Congratulations to Leicester City – and the financial planning lesson this provides
Well, we all saw that coming, didn’t we?
Leicester City – Premier League champions. Even writing that it still doesn’t seem real. No disrespect meant….
Let’s put some context on this. At the beginning of the season, bookies marked up Leicester as a 5000/1 shot to win the Premier League. So a long shot to put it mildly.
If we assume these odds related to the real statistical probability that this would actually happen then we can convert this to an approximation, this was a 1 in 5,000 chance.
In the rugby world cup Japan defeated South Africa – a 1,000/1 shot. And in the US open tennis Serena Williams lost when 1/750 ‘odds on’ in her first round match after winning the first set……
Again, assuming the odds were reflective of the chances of these events occurring, then they were a 1 in 5,000 chance, a 1 in a 1,000 chance and a 1 in 750 chance, looking at just these three examples.
Wow! How unlikely was all this? The answer may surprise you – these shocks according to probability were, in reality, very likely. Not these exact ones particularly, but surprises of this type and of this magnitude should be occurring all the time.
And this is where we can directly link this to financial planning.
Every day, every week, events are occurring. Sticking with sport there are thousands of leagues, matches, match up’s, races, tournaments, Grand Prix’s and championships. Most of which end with predictable results. But occasionally they don’t – the unpredictable happens. If something truly is a 1 in 5,000 chance, then by the time 5,000 such occurrences have taken place you would expect one of the ‘long shots’ to have occurred.
The fact is we don’t focus on the 4,999 times it doesn’t happen.
The ‘outlier’ occurrences happen and always will, just not very often!
This relates to financial planning because the same principles are in place. Most of what happens in markets and economies is normal, relatively predictable and uniform, but sometimes the unexpected takes hold and, as above, always will.
What this means is that – over time – the one true shock would be if there were no shock events or outcomes. We should always expect unpredictable events to occur. But because they are unpredictable we just don’t know where or when.
Financial Planning is all about being prepared, because we know that outlier outcomes happen.
The paradox is this: shocks and the unpredictable are always to be expected, but the very nature of this paradox is we don’t know what form they will take or when they will crop up.
When constructing our future financial plans we have to be mindful that we are doing so with this backdrop and the portfolio should be stress tested – as far as possible – to cope. Too many people’s plans are based on the expected and predictable; assuming the historic ‘norms’, which have dominated in the past, will be repeated in the future. Well, this may work most of the time. But it won’t all of the time.
Just as it “had to be” Chelsea, Manchester City, Arsenal, Manchester United, or just possibly Liverpool or Tottenham who would win the Premier League, but then suddenly it wasn’t any of them, so the investment or economic markets will, when least expected, produce a shock which no-one could see coming.
Many people will have their finances structured so that everything works provided “one of these big teams win the league” but will fail should a completely ludicrous “outsider win the league”, because that couldn’t happen – could it?
The question to ask is this: “are your finances geared towards downside protection and will they survive economic and market outcomes which are outside the norm?” Can they cope with bumps in the road (or worse?) or are you relying on business as usual to meet your objectives?
At Penguin Wealth, our approach is built on stress testing our clients’ financial plans to work in all environments and to work even with the most unpredictable future pathways.
If you want to review your financial plan, we are here to help you. All you have to do is get in touch here.
We are specialist financial planners, using established methods to build robust and powerful long-term solutions. This will include looking at a series of future scenarios and asking questions around “what if?” This may help you fathom whether you are protected against the financial equivalent of a ‘once in a lifetime’ event coming out the blue.