The software used by most financial planners involves a number of variables.

When you have variables, you have to make assumptions.

So the question is: Who is the assumer?

Someone is going to have to make some assumptions about all those variables including:

• What is inflation going to be?
• What rate of return will you assume for stocks, bonds, and cash?
• What will the level of standard deviation (assuming you still believe this is a good proxy for risk) be?

Do you see a problem here? How can anyone expect to have any real idea what the rate of return will be for the next 10 years, let alone get all the assumptions right. In 2007, Alan Greenspan was on with Jon Stewart and said:

….The trouble is we can’t figure that out…I’ve been in the forecasting [assumption] business of for 50 years, more than that actually, I’m no better then I ever was, and nobody else is…forecasting [assuming] 50 years ago was as good or as bad as it is today…

Forecasting is really guessing, and no one is any good at it. The assumptions that go into a financial plan are really forecasts, and in the end, nothing more then guesses. This is only a problem if we don’t recognize it. A financial plan should be seen as nothing more than a starting point. A best guess to get started in the general direction. The plan is worthless without the ongoing relationship with the planner.

We have talked about this before; it is about the planner, not the plan.

Over at the Morningstar Advisor Blog, I wrote about the problem of confusing the map with the landscape and the false sense of precision that comes from being the assumer and not recognizing that you will be WRONG.

If we start by accepting the fact that the assumer will be wrong, then we can move on and understand the real power of the planning process. If you can accept (and find a planner that accepts) that you hire a planner for the ongoing advice. You do not hire a planner to give you a map, but to help you navigate the ever-changing landscape.