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A PLANE’S ALTIMETER measures the airplane’s altitude. It’s a critical instrument—so important, in fact, that planes are typically outfitted with two. That’s for redundancy, in case one fails. In addition, because different altimeters work better in different conditions, the two readings offer pilots multiple points of reference.
I was speaking recently with a retired pilot, who explained this to me and asked how he could apply the notion of redundancy to his finances. It was a good question, one that’s relevant to anyone building a financial plan.
Let’s start with the numbers. Statisticians like to joke about the six-foot man who drowned in a river that was five-feet deep on average. The idea is that we need to be careful in how we use statistics, and this certainly applies to financial planning. We know, for example, that historically the U.S. stock market has delivered 10% annual returns, but that figure is a 100-year average. In our own retirement, each of us will experience some set of market returns, but we don’t know whether those returns will be better or worse than the long-term average, and that could make all the difference. How can you navigate this uncertainty?
One way is to assume that future returns will be lower than they’ve been in the past and to assess the impact of those lower returns on your plan. That approach would make sense especially right now, after the strong above-average returns we’ve enjoyed over the past decade.
Another approach would be to use Monte Carlo analysis. This is a statistical technique that gauges the likelihood of a plan’s success under different market conditions. It has its own strengths and weaknesses, but can be helpful in illustrating the probability of various future outcomes.
How else can you account for the uncertainty of market returns? I suggest turning the dials on more than one variable. What if you varied your expected spending rate or looked at the impact of moving? It’s useful to examine alternative scenarios even if you don’t know precisely which way things will go.
Another way to pressure-test your plan is to do what the late Charlie Munger often recommended. “Invert,” he said. “Always invert.” The idea here is to turn a problem on its head, to look at it from more than one perspective. In addition to asking how you might set your plan up for success, also ask what might cause it to fail? While none of us can see the future, an advantage we all have is we know our own circumstances. That puts us in a better position to assess which risks will likely be most relevant. Some folks worry more about their health. Others worry about their living situation or about the wellbeing of a loved one.
Another important step is to tune out unnecessary noise. Alberto Brandolini is an Italian software engineer. In observing the amount of misinformation on the internet—and how quickly it can spread—he coined what he called Brandolini’s law. It postulates that the amount of energy needed to refute misinformation is an order of magnitude greater than the effort required to produce it. Because Wall Street’s marketing machine is often in overdrive, this is a key point. In constructing your plan, try to steer clear of sales pitches for the Street’s latest “innovation.”
In the last interview he gave before his death in 1976, Benjamin Graham offered this advice: “The present optimism is going to be overdone and the next pessimism will be overdone.” And this cycle simply repeats. “You are back on the Ferris Wheel,” he said. This is another important idea. In constructing a plan, it helps to be skeptical of the prevailing sentiment of the day, whether that happens to be excessive optimism or extreme pessimism. Instead, stay focused on your plan and your goals.
On this point, it’s worth keeping in mind the history of the transportation industry. Before automobiles gained popularity in the early 1900s, it’s estimated that there were more than 4,000 companies in the horse-and-carriage business. In hindsight, it’s clear that the right move for them would have been to try to transition to automobile manufacturing. Carriage makers had relevant skills and were well positioned to make this leap.
But they adopted a collective mindset that the automobile wasn’t going to succeed. They referred to cars as “devil wagons” because, early on, they were noisy, unreliable and dangerous. As a result, just one carriage maker, Studebaker, correctly assessed where things were going and successfully shifted to making automobiles. Every other one of those 4,000 companies was so convinced of an alternate reality that they put themselves out of business.
This carries a lesson for financial planning. There’s no virtue in being contrarian simply for the sake of being contrarian. But in making a financial plan, it sometimes helps to consider viewpoints that differ from what everybody “knows.”
In their book, Like, Martin Reeves and Bob Goodson explain the art required in soliciting opinions from other people. On the one hand, there’s an advantage in casting a wide net. Diverse opinions help us sharpen our thinking. But there’s also a key advantage in talking to people who are just like us: Their knowledge and experience is most relevant. A chef will want to consult another chef with a cooking question. But that has its limits. At the advent of the automobile, horse and buggy makers probably leaned too heavily on each other in discussing the future of their industry, thus creating an unhelpful echo chamber.
There’s no easy answer to this. But if it seems like everybody is looking at a single altimeter, it might make sense to consult another one.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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Check out Boldin.com. An excellent, inexpensive resource for the DIY personal finance geek. Test anything and everything you want!
When assessing plans, be it financial or whatever ir was customary to attempt to reveal the weakest links in that chain. This sometimes unconcealed other, hidden flaws. We would say we couldn’t make things bulletproof but we could make them idiot resistant
Attributed to Aaron Levenstein, business professor at Baruch College – “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.”
To me, “winning” is defined as having a bond/stock nest egg large enough to support you to the end even if stocks plunge and don’t come back in your lifetime.
IOW, to be able to live on just the fixed-income holdings. Better yet, to live off just the interest from the bonds, all of which are TIPS.
That last is the pinnacle of Mount Security.
That said, absent a strong motive for leaving a very generous estate, having enough bonds to sustain you even if spending them down to near-zero is good enough.
The definition presumes living comfortably, rather than in a hovel on thin crusts of stale bread. That done, mansions and a caviar-diet are also not required.
I use a conservative number for returns. For example, if expected returns for an AA like mine are 6%, I would use 4%. I also use real returns as opposed to nominal, and I am conservative in inflation rate, using higher number than expected. It has worked for me in long term planning. Short term predictions? Who knows.
I grew up in Detroit and want to share a side story to your Studebaker one.
The Fishers were a large family of German immigrant blacksmiths and woodworkers who settled in Norwalk, Ohio. The family became known as excellent carriage-makers in their new homeland. The two eldest Fisher sons moved to Detroit in 1903 (the year after Studebaker, a wagon-making company, made their first automobile) to work for their uncle at C.R. Wilson, an early manufacturer of bodies for horseless carriages.
The Fisher brothers were apparently the first to realize that an enclosed car body would be more convenient for driving and eventually founded Fisher Body in 1908, initially producing bodies for various manufacturers, including Ford, Cadillac, and, yes, Studebaker. The seven Fisher brothers (five younger ones had joined the enterprise) soon became wealthy leading citizens of Detroit, and even wealthier when Fisher Body was acquired by General Motors in the 1920s. The slogan “Body by Fisher” was stamped into cars for decades to come.
I guess the point of this little Detroit history is that there may be only one famous first mover who’s the original contrarian. But there is a lot of runway (and money) for the young and hungry ones who come along next to refine a product, as we saw with the internet and now see with all the startups working to expand AI.
Luckily, with total index funds, we can ride along with the success of “the young and hungry ones.”
[I cobbled this side story together from Google and https://www.detroithistorical.org/learn/online-research/blog/fisher-family-story%5D
Love This Story!
I remember that stamp on cars in my youth. Thanks for the story and the point. Nice riff.
I do to. For many years in the 60s, 70s, and early 80s my father drove a GM company car and I remember the Fisher stamp.
I used to work fairly closely with someone with someone for years. We each had wildly different opinions on just about every subject. Partly because of this, I think we annoyed the heck out of each other.
And yet, over time, because this person always had such a different perspective on every issue we had to deal with, I came to value his opinion.
So much so that even when I was working on something that he had no involvement in, I would often solicit his opinion because, while I would not always agree with it, I knew it would be given from a perspective that I did not have, indeed, from a perspective that I could not have.
If you are a boss, you would want to make sure there is at always least one of these people in the room when you are making an important decision. As has been said before in different ways, if there are 5 people in a room responsible for making a decision and they all agree, 4 of them are redundant.
In debate class we prepared to argue both sides of an issue and didn’t know until we stood up at the front class which side we would be arguing for. It helped me over time listen to other points of view.
Bill Clinton made sure to do this when he was President!
Very smart indeed.
When I taught management and group decision making I’d tell students to assign a couple of people in the group to argue against whatever decision was being proposed. Assigning them removes it from being “personal” when there are disagreements and criticisms and it helps bring other viewpoints into the picture to be discussed (of course there is a point where you want to hear what they really think).
I always liked this idea …
“If we are all in agreement on the
decision – then I propose we
postpone further discussion of this
matter until our next meeting to give
ourselves time to develop
disagreement and perhaps gain
some understanding of what the
decision is all about.”
— Alfred P. Sloan —
Think again.
So should I rethink my attitude towards crypto? It is currently the devil’s currency in my opinion.
It is a currency in the same way lottery tickets are an investment. Stick to your investing game, let others play theirs.
I think you should, but really only consider bitcoin. It’s different from all the rest. They say, “If you understand it, you own it.”
Huge fan of Munger’s “always invert” advice. Investing requires optimism but also skepticism, a tough but winning combo.
Winning as an investor, over the long haul, is more about avoiding big losses than achieving big gains. You’re more likely to do this if you also stick to the Grossman Principle: if you need to make an investing decision with unknowable outcomes, aim for the middle of the road. Avoid extreme options.
And finally, Housel’s Maxim: Know the game you’re playing and play only that game. More money is lost by people following others’s strategy. Stick to the plan that works for your needs.