Presenting a financial plan to a new client offers an opportunity for advisors to answer questions and problem-solve... and to build trust between an advisor and their new client. Clients rely on advisors to create plans that provide a clear path towards their financial goals. However, at the same time, advisors know that even the best laid plans can go awry. Plans could be significantly altered by something as small as a 0.5% rate change in inflation, to say nothing of recessions, new laws, and other economic ups-and-downs. Which creates a conundrum, as while advisors want to promote trust in their advice (and in their own expertise), there's always the caveat that events that are out of our control often interfere with even the most painstakingly crafted plans.
In our 70th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards explore why advisors experience paralyzing fear around being wrong, how advisors can shift their mindset around their desire to "be right", and how they can nurture self-confidence in the face of the unknown.
As a first step, it’s helpful to frame up the correct mentality around the plan itself. When creating a financial plan, the reality is that advisors are helping clients make important decisions with incomplete information—because no one can even know for certain what the future holds. To be fair, planning projections aren’t haphazard shots in the dark; advisors have the technical expertise and the right tools. But advisors are up against the uncertainty of the future. In fact, Monte Carlo simulations inherently consider countless scenarios that never happen, and might not even include the one that does!
Instead, financial plans aren’t actually about being right... they're about being less wrong. Or put another way, when framing up the conversation to clients, it’s important to remember that a Monte Carlo “failure” results in a course correction, not bankruptcy—and that minor adjustments are needed to get a plan back on track. The reality is that it's highly unlikely that advisors and clients will just wake up one day and see that their plans have plummeted into failure. Financial situations change gradually, and when conversations with clients are ongoing, they can easily be adjusted based on how much risk—and potential for course correction—a client is willing to accept.
Given, then, how adjustments and risk come into play, framing these conversations with clients in black-and-white terms of “success” and “failure” is counter-productive. Instead, it may be helpful for advisors to think of their core projected plan as a line. A line will almost certainly go askew from its projection because it is so narrow. However, a line that has been buffeted with guardrails, with plans for what to do when the unexpected happens, is one that is “successful” at the end of the day. Conveying a guardrail-focused, adjustment-based plan can give advisors more confidence in owning their projections because it acknowledges that no one knows the future; instead, advisors are simply guarding against it.
Ultimately, the key point is that projections are inherently uncertain... and are only the first step. Learning to own uncertainty when presenting a plan to a new client will help set the stage for conversations later on when clients inevitably get nervous about whatever may be going on in the world. At the end of the day, advisors who embrace uncertainty are the ones who are prepared to take action as life happens!
***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
Kitces & Carl Podcast Transcript
Carl: Greetings, Michael.
Michael: Hello, Carl, how are you today?
Carl: I am fantastic, fantastic.
Michael: Fantastic? Fantastic's pretty fantastic.
Carl: Yeah. It's hard not to be. We had this big fire here—5,000 people had to be evacuated, and it started raining like crazy today, so that's why we're all fantastic and happy. Rain’s good.
Michael: And for people who aren't familiar where is here for you?
Carl: Park City, Utah. Yeah, the West is generally on fire, and we've avoided it right around here, but just literally right over the ridge I'm looking out the window at, there was a big one... And it ended up being like 500 acres. It was super close to 5,000 homes.
Carl: Anyway, that's why we're fantastic because it was raining today. Normally, when we get rain here, we're like, "Oh, it's kind of sad." But today, rain is good.
Michael: Rain is good.
Realizing “Wrong” Is Part Of The Job (And What Wrongness Means) [1:04]
Carl: This reminds me a little bit of this conversation I had recently. I had breakfast with a relatively young, probably two years out, financial planner, who I consider one of the best, sharpest, smartest financial planners I've ever met, and especially at her age.
Michael: So young up-and-coming superstar?
Carl: Yeah. And she brought up this fear. And it's interesting, I've ever heard this hundreds of times. And since the conversation, it's come up in probably three or four different podcasts that I'd done. This fear, almost a paralyzing fear around being wrong. In our planning, this need to be like, “Well, what if I'm wrong? What if the plan doesn't work out the way it's supposed to? What if the portfolio needs to be adjusted? What if the goals aren't what we thought they were going to be?” And even as I'm listing those, to me, I realize that something has flipped in my head where I've realized that of course, the plan isn't going to work out the way it's supposed to, or the way you planned. You know what I mean? Of course, it's not going to. And I've just accepted that doing real financial planning means living in wrongness, and the goal is to be a little bit more right each day. It's not about being precisely correct today, it's about being less wrong tomorrow. But in accepting that, you have to accept, if we could scale, if there was a scale of wrongness, you implied in the idea that you're going to be a little less wrong tomorrow is that you're wrong today. And if there was a scale like you're 10 wrong and tomorrow you want to be 9.5 wrong. That means we have to accept that we're wrong. So first question that I'd like to talk about is how does it feel to live in wrongness as part of your job? How do you deal with that? And second, would be how do we communicate that with clients? Because the person next door, the joker down the street, is going to sell a list of certainty. Prospective clients coming in your door and their door, they're going to tell them how certain they are, even though we know that's a myth. They're going to sell certainty. So how do you communicate with clients that, “Look, it's course corrections, it's ‘less wrongs’?” So those are the two questions. How have you approached it? Because you're a very precise person, like ‘I'm going to analyze, I’m going to think.” You have a reputation of analyzing things that you do in “studies” and you have—
Michael: Research. We try not to put the research in quotes.
Carl: You have “abacuses.”
Michael: Like they give us actual research, but, yes.
Carl: You have—
Michael: For those who can't see, Carl is air quoting right now.
Carl: You have large calculators and big computers. How do you deal with the fact that... Sorry, this is a long-winded intro, but I've only recently discovered that it's not an ‘or,’ it's an ‘and.’ What I mean by that is we're going to do the best we possibly can to be exactly right on this plan, and we know we're wrong. That's a lot of cognitive dissonance to hold two competing truths in your head at the same time. So how have you dealt with it?
Michael: Well, and frankly when I am wearing my hat as a professional, ‘wrong’ often means sued and liable. So I have to admit, maybe it's even just a framing because I don't disagree with the principle you're putting forth here. I think we all get when we do the financial planning projection that says they're going to have $2.713 million in 47.2 years, it's probably not going to be exactly that. It's like I get it. I think we get it at that level. I will admit, just the inherent nature of describing it as wrongness and how wrong we are—yeah, that makes me really antsy straight out of the gate, because I get sued when I'm wrong. Yes, I realize no one's going to sue me because it wasn't exactly $2.713 million in 47.2 years. But starting out with the client, like, “Let me tell you how wrong we're going to be,” that's tough for me just out of the gate.
Carl: But you know, because you've done these experiments, all we have to do is change inflation from 3 to 2.5, or 3.5, or whatever, and we see these wild swings. We know that planning is about narrowing in the range of outcomes over time. Real planning in conditions of complexity—which is what we humans and markets are—real planning is indeed about being less wrong each day. And so we can phrase that differently. I'm not saying you walk into clients and say, "Hey, well, I'm super wrong today." I'm not saying that. That's why I'm saying we can talk about communication. But internally, we know that if we want to frame it differently, it's about course corrections. It's about the ongoing process of that. It's not about the event of the plan.
How To Frame Projections As Being “Less Wrong” Over Time [6:36]
Michael: Well, and I will say I think from my end, the biggest thing that shifted is when I project back to how I had these conversations in the first couple of years of my career versus how those conversations go now. I think if one fundamental thing has changed, it’s that early on, I literally talked a lot more about the projections. The math of here's what you project out to be, and we're on track, or we have enough or not enough, or more than enough, or you need to save this much. And it was very much about the numbers of that projection, how they were shaping up. And then the classic, we'll do fresh projections on a free and ongoing basis because life may turn out a little bit differently than this. And so, we'll continue to project again in the future.
Carl: Let me ask real quick, in that conversation early on, were you using confidence intervals too? Like, we're in 7%—
Michael: Yes, at least my spiel for it essentially was very Monte Carlo-based— because it was at least a thing already by then, the first generation of it. A lot of those conversations were Monte Carlo-based because my spiel even at the time—this is like 2003 or something—was talking about, “Look, there's a lot of different ways this can happen in the future. I don't know which one is going to happen in the future. I've done an analysis that includes thousands of different possible scenarios, and we're actually looking at how likely it is for this particular outcome to occur. And you have a 97% chance that we're going to do at least as well as what you need to do to achieve your goals. And because we're going to be updating this on an ongoing basis, if we start going down the path of the other 3%, we're going to have a conversation before you get there.” And so I will admit, at least for me, just coming at it from the Monte Carlo probabilistic basis . . . because my thing always started with, “I got to explain a little bit of Monte Carlo. It's kind of like flipping a coin. We put it through 1,000 times. We look at all these different scenarios” —That it was very much built around the story of it's a world of many, many possibilities. I have no idea which of the possibilities is going to happen. I can tell you overall how likely it is that your path is going to be the—
Carl: Pause, pause, pause. You were saying those words in the beginning, I have no idea which...
Carl: So you're not saying that's in evolution. You're saying in the beginning, you were like...
Michael: Because, at least for me, that was how I learned to describe and explain Monte Carlos. Just the whole nature of it was that it generated 1,000 different possible market scenarios. Some of them are even worse than anything we've ever seen, because that's actually what happens if you run 1,000 trials in Monte Carlo. Some of these are the worst I think we've ever seen. I don't know which of these is going to turn out to be the one. What I do know is that about 97% of them turn out to at least cover all of your goals. So we would view that as having you very well on track for your goals because we'll do updates over time, and if it turns out the other 3% is happening, we'll have that conversation when the time comes.
Carl: Yeah. No, I love that. See, but that to me is another way of saying, “Hey, we're going to be a little less wrong over time.” And I'm not suggesting you say that to clients. I do. I think it's totally fine. But the way you're saying it, it's not even that we're using different tools; it's the way we present it. And I've watched this sort of false sense of precision that's crept in. When we start using sophisticated tools that were designed for atomic bombs—and we all desire certainty because it's a human trait, and we want a little physics envy, and we've got all this evidence-based stuff going through the industry— we forget that it's a complex adaptive environment. In the end, we're not sure. And you're using language like that as you ascribe it. Like, “I'm not sure which one of these...” That's much different than, "I'm 97.23% confident that you're going to meet your goals." That's a different discussion. But we've talked about this before. I want to make sure we don't miss the point. Here's this young financial planner who's struggling with what I think a lot of us struggle with: the fear of being wrong, the fear of the plan not working out, the fear of having a map that they need to defend. How did you used...? Again, you strike me as somebody who cares about being right.
Michael: Oh, yeah. Very much so.
Carl: How did you deal with that? Change 97 to 72. How did you deal with knowing that there is at least a nonzero chance?
How Monte Carlo Financial Plans Can Have More Outcomes Than Failure/Success [11:43]
Michael: So, I remember this client case very well. So, we'll call them the Smiths—obviously they weren't. We'll call them the Smiths. So the Smiths were a very high-spending lifestyle. They were actually involved in the investment industry. They had made a huge amount of money. It was like a low eight-figure portfolio. They spent hundreds of thousands of dollars a year, which was well within a 4% withdrawal rate for them, going back to that world. There was a lot of money moving around. That still wasn’t enough for them. They had a $400,000 lifestyle, but they wanted a $600,000 lifestyle on their $12 or $15 million portfolio or something. And they were fairly young. They'd gotten to this point in, I think back then they were probably in their late 40s. So this is like spending $600,000 on $12 million with a 50-year retirement projection. Which, at least at the time when you plugged all that through a Monte Carlo engine, they were at a 60% probability of success. And so, I came into the meeting. All the mental preparation for how are we going to tell people who have a $50,000-a-month lifestyle that they need to rein it in a little when they've got $12 million that's growing? And we start going through the plan and we get to the “There's a 60% probability of success with your plan, the way that you're spending.” And so they said, “So you're telling me that there's only a 40% chance that we would need to cut our spending?” “Well, yeah, there's only a 60% chance...” Everything else we're putting out the door is 95% to 97%. So we're like, “You have a virtual veritable disaster. We're presenting you this train wreck of a 60% probabilistic plan.” And the first thing Mr. Smith says was, “So you're saying there's only a 40% chance we would need to cut our spending.” Like, “Well, yeah. Yeah.” And he said, “Well, great. We're going to keep living our lifestyle. And if we start going down that path, call us and we'll change. But if you're telling me that there's a 60% chance that we won't need to change a blessed thing and there will be money left over? We're going to go live our lifestyle."
Carl: That's so awesome.
Michael: That was how they went. They went forth from there. And it actually worked out fine, because this was probably like 2003–2004. So, markets were very, very good in the mid-2000s. And they quickly got ahead of their original projections. So as far as I know, they're still doing fine, and that path hasn't been touched for a very long time. But in this world of like, we've done so much work to analyze your plan and figure out the adjustments that your probability of success is something like 90-plus% thing, the first thing to them was, “So there's only a 40% chance that we would have to cut our spending?”
Carl: Yeah, that's so good.
Michael: They were totally flexible. Now obviously some clients, any spending cut is a personal catastrophe. So you can't run that level of cavalier. But they totally had very, very flexible spending. They knew they spent extravagantly. They were fine with it. Okay, if we start going down the bad path, we'll make changes, and if we don't, we won't. And in essence, what was going on for them that I really only came to appreciate even many years after that is that we tend to start with, “You've got a 97%, or 92%, or whatever it is, we've got our threshold—” Different firms have different thresholds of when is it great? When is it okay? When is it so low that you're like, “Oh, I've got to rein the client in off of this because we're on a near-disaster path”? And for pretty much every firm I've ever talked to and known, 60% is lower than pretty much anyone's threshold to be comfortable as an advice professional, because you're doing the math in your head of, “How much do I get sued if the 40% happens and they go bankrupt?” But their world was still like... Mr. Smith got it better than I did because I was in a world where there's only two outcomes, the 60% good or the 40% bad. And he had a completely different framework, which is, “If we start down the 40% path, we will cut our spending. And if we don't go down the 40% path, we won't cut our spending.” So I was living in this black-and-white world, where there's going to be a success or a failure, and I'm terrified it's going to be a failure on my watch. And Mr. Smith was already like many steps ahead in the if-then, what-if scenario formulations that I couldn't even do in the plan. Mr. Smith's plan was essentially, “We're going to spend here, and if the market falls 30%, then we're going to cut our spending.” Which I actually couldn't even do in the planning software. You can't say, “Cut client spending but only if the portfolio goes down by this much.” A few tools are now just starting to do that, like Capital just launched a thing. But historically, we couldn't do that in our planning software. So I only had that you're 60% in the green or 40% in the red. Mr. Smith was already making his own what-if scenarios and knew that he had enough flexibility in his plan. And so...
Carl: It's so good.
Michael: ...they went off happily down the road of their 60% Monte Carlo, which I think is a version of this. I was so fixated on the—"Oh my gosh, I can't send a client out there that has a 40% chance of destitution, because it's bad for them, and it's my fault, and it's on my watch, and I'm getting sued, or I'm just going to feel awful."—All those negative things that we start piling on. And he was just like, "Look, I've got $12 million. If it's going that badly, I'm going to see it coming, and I'm just going to cut my spending. It's okay."
Using A Guardrails Framework To Protect Against Failure [18:15]
Carl: Yeah, I love that story. That's really great. I think it makes me think of the fact that in the end, we're helping people make really important decisions with incomplete information. There's no way to have the information about what's going to happen for the next 3, 5, or 10 years. We're going to do our best. We've got some really sophisticated tools to model it. Everybody's happy. We're better at this than anyone else in the world. Great. But essentially what we have to do when we're navigating a complex adaptive environment like a client scenario is we've got to have a strong opinion. And here, what I think was so cool is Mr. Smith’s strong opinion was, "I'm going to keep spending this way.” Then you actively—and that's what I think my financial planner friend I tried to emphasize—you create a hypothesis. 60-40 is just a hypothesis backed up by some really cool modeling tools. And then you actively look for disconfirming evidence. You're on the lookout for disconfirming evidence. And instead of feeling like, "Oh, no, disconfirming evidence showed up," we're actively looking for it. We're not looking for confirmation bias. We're just actively looking for disconfirming evidence. And then if, and I think more likely when, disconfirming evidence shows up and our hypothesis turns out to be slightly not true one way or the other—it could be, as you pointed out, a good piece of disconfirming evidence, it could be a negative disconfirming. Then we know, “Okay, cool. We've got these powerful tools to adjust.” And so if you can get that, to me, it's like a mindset shift where we start to understand that disconfirming evidence isn't bad. We're not wrong. And when I say wrong, I don't mean like, "Argh, wrong." You keep using the word lawsuit. I don't mean bad wrong, I mean like a math problem. You got an incorrect answer. You don't have any fancy feelings about an incorrect answer. It's just an incorrect answer. So I think making that switch is really challenging for us, because that's what we do, is we're helping people navigate irreducible uncertainty. There's no way to get that "right" all the time.
Michael: Well, to me, at least, like the word you said at the end really is the distinction. And maybe it's nuance and we're parsing language. I'll admit, I do have kind of this visceral, like you're right, like, "Dammit, my model wasn't wrong. Don't wrong my model."
Carl: Yeah, yeah.
Michael: But, and so, to me, there's a difference between being wrong and the mere fact that there is an uncertainty around. As you said, there's an irreducible uncertainty. And to me, I guess that's part of why frameworks like Monte Carlo worked well or worked better, at least for me, in having those conversations, because it started with the point of there's a whole bunch of different future market scenarios. I don't know which one it's going to be. So I just analyzed all the possibilities and we'll talk about the range of outcomes, and...
Carl: Plus a bunch that have never happened.
Michael: Right, plus a bunch that never ever happens. We're probably getting more uncertainty than you've ever seen in the world because that's literally how the math works. And so, to me, that's where it started. There is no right or wrong in that projection. Mr. Smith was not going to be right if they landed in the 60% and wrong if they landed in the 40%. I don't even know whether they were going to land in the 60- or the 40-zone. They didn't know. The only difference was I was afraid they were going to land in the 40, and they didn't care because they just said, "If we start moving towards the 40, we're just going to steer right on back out of it." And I do think there is an aspect of that... it's very easy when we start doing those projections to get stuck on that projection. I know you like to call it getting stuck defending this map of what the future was supposed to be, and then it gets really hard when the future doesn't turn out that way. At least to me, the more we embrace that, “There really are a range of outcomes, and I don't know what the outcome's going to be. I'm here to help you make the adjustments along the way for whatever path we go down” gets us to a better place.
It reminds me... I know Matthew Jarvis these days is talking a lot about their guardrails framework, which they pulled from the Guyton research years ago of like, "Look, we're just going to try to keep clients between—" I don't know what their numbers are—“between a 4% and 6% withdrawal rate. As long as you're within the guardrails, you're fine. If you drift out of the guardrails you're going to make an adjustment. Now, I don't know if you're going to hit the good guardrail, the bad guardrail, or if you're going to totally cruise down the middle of the lane and hit no guardrails. What I know is we've got a plan about what happens if you deviate out of the guardrails and a plan of what you do if you stay in the guardrails. And so I'm just here to go with you and execute the plan. I don't know what it's going to be, but I know that whatever scenario comes, we have, in sort of the most literal sense, a plan. Here's how we will respond if these things happen, and here's how we will respond if those things happen. And then we're going to find out what they are.” I do think we have a challenge, particularly just in our planning software world, where our tools aren't built to show that. Literally, I think Matthew made his guardrails in an Excel spreadsheet because financial planning software that's built to do all this stuff basically can't show that relatively simple, straightforward thing on an ongoing monitoring basis. So I do think our tools set us up for this, sort of problematic, defend-the-wrong-map that never turns out that way, because it's not going to be $2.713 million in 47.2 years. But where you come out for that, like where Mr. Smith went, where Jarvis has ultimately gone, is that you just have some parameters in place. To me, just in the most literal sense of the word, you have a plan. A plan is if X, then Y. That's a plan.
Carl: Exactly right.
Michael: When you have that plan, you literally have a plan. I don't know what the future's going to be. I know we have a plan about what we're going to do. And I think the gap, at least where my thinking has changed on it from when I used to have these conversations early on, is when I had them early on I would talk about Monte Carlo, lots of trials, uncertainty, I don't know what the future's going to hold, but it basically always ended with, "And that's why we do updates with you every year and why you have to keep working with us on an ongoing basis ,because we're going to always be here to carry you through it." And that was fine for us. It was frankly very self-serving because it was like, “You have to always have us here because we have to update your projections every year to see what's going on.” But we never got to the next step which was actually doing what Mr. Smith had already done, which was, “Well, if my portfolio falls, blow this, I'm just going to cut my spending. And if it doesn't, I won't.” And we didn't come with a plan, we just came with, “We'll monitor and figure things out as they go.” And I think that was a shortfall of the planning process for us. I don't think it was nearly as satisfying for clients as really having what I’ll call “the plan,” which is if-this, then-that; if-this-other-thing, then-that-other-thing. And I think we don't often get to that part. And when we don’t, then we get stuck living in the wrong.
How To Embrace And Own (Reduced) Uncertainty As An Advisor [26:06]
Carl: Yeah. No, I think, look, there's a couple of things that are really important. One is if Mr. Smith got to keep spending, that doesn't make you wrong. If you had to cut back on Mr. Smith's spending, that doesn't make Mr. Smith or you wrong. It means that's what the thing is. It's a factual situation on the ground that needs to be dealt with. There doesn't need to be a bunch of fancy feelings. That's why I get so fired up about the idea of being a guide instead of a defender of a map. Because a defender of a map has all sorts of fancy feelings: shame, blame, I'm wrong, you're right, sue—all those words that you've used. A guide says, "Look, a storm blew in. We've spent lots of time in the mountains. We know storms blow in. We have contingency plans, that's what we call them. And in fact, we even talked about it in our first meeting. We said if this happened... We talked about it. Would you like to die sooner? Would you like to spend less? Would you like to save more? Like we have all these levers. We talked through which one you'd prefer. Mr. Smith, you told us you prefer to cut spending a bit. Guess what, the storm blew in. We don't have to have any fancy feelings, nothing. We just cut your spending. That's what we talked about.”
Carl: I think what the problem is for my young financial planner friend who's a bit paralyzed—and in all these other conversations I've had about this—is we've misinterpreted what our job...the job is to live in that world that you just described. Yes, we'll have contingency plans. Yes, we're going to draw the best most precise plan we can ever have. And we know that when it doesn't work out, we're going to be looking for disconfirming evidence. When it shows up, we already have a plan. And we know it will show up. The easy one for me is when the market's down 30%. When the clients call, it's scary. It's scary for them, it's scary for us. You and I talked about this ad nauseam. But when it happens, we knew that was going to happen. We didn't know when; it's in the data. But it's still scary. And so you have to realize that that's... It's not about figuring out a way that you can prevent being "wrong," and I'm using that word just like in a technical definition. I don't mean like weighty, just incorrect. You know your job is not to figure out how to be incorrect. Your job is to recognize that there will be variability, and you have to look people in the face and help them make decisions in irreducible uncertainty. After all the amazing work you have done to reduce the uncertainty, there's still a pile of it. And the pile of it exists within a set of bands depending on the kind of work you've done. So you've narrowed the bands of it, there's still uncertainty in those bands. And your job is not...you can't, no amount of work, thought, carefulness, big calculators, giant abacuses will get rid of that uncertainty. It's still going to be there. And so then if we can flip the switch to realize like, "No, actually, that's what I get paid for is when that stuff shows up, to be the calm head, to help navigate, to pull the plan off the shelf and go, 'Oh, yeah, that's right, Mr. Smith, we talked about this. I've got you. Don't worry. All we have to do is cut your...'"
Remember those 2009 discussions where people would come in, like the retired couple living off a pension and they would think it's the end of the world? And we would say, "Could you go without your cost-of-living increase for a year or two?" And they would be like, "What? That's all?" "Yeah, that's it." We already had that in the plan. We already knew. "Could you just skip your cost-of-living increase until further notice, maybe two or three years?" "What, that's it?" "Yeah, that's it." Because we already knew. So I think that, to me, is the answer to this worry we have about being precisely correct, is do the work, do everything you can to be as precisely correct as you can, and have a plan when the irreducible uncertainty surely will show up. And live in that space. Which I think leads us to another discussion which we'll have another time, which is what does that mean for our training? What do we do to live in that space of what I like to call "wrongness," and I'm using air quotes there because I don't want you to feel like, “Oh, bad.”
Michael: Thank you. I appreciate that.
Carl: That's a slightly different version of this job when you start to realize that resilience, calm, confidence... those are important pieces of the job. So that's super fun. Do you think we answered the question? I don't know if we did.
Using Levers To Make Important Decisions With Incomplete Information [30:50]
Michael: I think so. I think so. Again, to me, because then I have to think of this as the most nerdy of terms. The classic retirement projection is like that line of wealth and how it's supposed to build over time. For those who can't see, I'm drawing with my hands up and to the right. We get very focused on where that line ends. Does it end high enough? Does it end positive and not negative? Or does it have a margin for safety so that in case they live longer...? We tend to project that line. And to me, I think the biggest takeaway in the shift is that it's less about drawing the line, and it's more about where you draw the guardrails around that line. The line is a projection that's never going to turn out to be precisely right.
Carl: You're right. Perfect.
Michael: The guardrails you draw around that line are what keep it from ever getting so far off track that a disaster occurs. And the important part is not where the line goes, the important part is actually where the guardrails go. And that's still a function of tools, and projections, and Monte Carlo. There's lots of ways to define those guardrails the same way that we historically defined the line. But I think the biggest distinction to me is the line is always wrong, the guardrails are the plan. The guardrails are really the part that actually matters, not where the line is projecting. And that, to me, is the shift, at least, that makes sense in my head. I'm drawing it with my hands for all those listening on the podcast. But that's the distinction. Because the guardrail shouldn't be off. The guardrails, almost by definition, should be what keep you from going off, going too far off the road, and really getting in a ditch, and getting in trouble.
Carl: Yeah. No, I totally agree. I think it would be fun, maybe we can tease this a little bit. We should talk about different versions of guardrails because I have a favorite version that I haven't seen. And I think the spending policy—4% to 6% or 3% to 6%, all of those—I think that's really, really true. And having a conversation around what levers are pre-... These are lifeboat rails, what levers are you going to pull when you bump up against the guardrails? Because we've got more than one lever. It's not just asset-allocation, it's not just risk and reward. There's five or six levers. So I think that's the important stuff. So if you've ever been worried about... a little bit paralyzed because you're heavily analytical, and you're super smart, and you've got powerful tools, and just realized it's not... One quick last story, I've got a friend who runs a sort of distressed company private equity firm. And he was yesterday telling me like, "Carl, I got two calls yesterday from companies who were like..." Let's just call him Sean. He's like, "Sean, we're going 100 miles into a brick wall. We've got about 14 days."
Carl: His job for 30 years...
Carl: ...has been to step into those scenarios. And what he always says is, "Look, we've got to make really important decisions with incomplete information. There's no way we're going to be right, but we've got to decide today." And I think that's a version of where we live. Know that you can't, no matter how smart you are, no matter how powerful your tools are, you can't get rid of the irreducible uncertainty. You can make these guardrails and these plans to deal with them, and then some of the other podcasts we've done on making yourself harder to kill and more resilient, that stuff becomes more and more important because you now accept that that's part of the job. So, I guess that does it. Thanks, Michael.
Michael: All right. Awesome. Thank you, Carl.
Carl: Amen. See you later.