I have a confession; I love the movie Sliding Doors. The millenials reading this will find this an oldie-but-goodie. I think it’s held up surprisingly well. And – yes – I did re-watch it as homework for writing this post. For those so culturally bereft as to have never seen this gem, here’s a quick synopsis: Helen (played by the angelic Gwyneth Paltrow) is having a very bad day. On her way home early from work, she barely misses the sliding doors of the subway that would take her home. Except inexplicably, her timeline splits and we witness two parallel lives unfold: one where she made the train and one where she missed the train. Hilarity, love and sadness unfold as we get to watch the dance of the two timelines progress. Alternate Realities
The reason that this has such a strong bearing on financial planning is that it introduces the concept of alternate realities. The concept of alternate realities is central to lots of good (and bad) science fiction, so if you are a geek like me, this is not a foreign concept. But for many, this is a new way of thinking and can sometimes be quite difficult. We remember our lives linearly: I woke up in the morning, went for a run, forgot my headphones, turned around, went home and picked them up, then continued my run. Because we remember things linearly and with great cause-and-effect, we tend to project things forward in a linear fashion. This can make financial planning difficult (you see, it did come around to finances eventually) because our future is unknown and unknowable. It then helps to think of our future not as a line, but as a set of probabilities: what if I hadn’t forgotten my headphones? I kept running and then a distracted driver plowed into me! Or I bumped into an old colleague and a quick conversation led to a life changing job offer. The possibilities are endless. What-if Scenarios One of the most effective ways I have found to help people think this way is “what-if scenarios”. When developing plans, think about the impact of scenarios on your linear or standard plan. In corporate strategic planning, this is called scenario analysis; but I like “what-if”planning better. It can be fun to think of other possibilities - Sliding Doors style - like, “What if we decided to have another baby?” or “What if I decided to quit my job and pursue professional karaoke?” The idea here is to come up with some things that may well happen even if the probability isn’t 100%. Or things that you might be considering, but aren’t sure of. Then you see what impact they would have on your baseline plan and how you could plan in advance to deal with them. In my experience what-if scenarios are more often good – new jobs, bigger families and new homes - than bad. Despite the good news nature of the typical scenario we must make sure our plans are robust enough to withstand the tough times too. Most people really don’t like to think about lots of bad scenarios. That brings us to…cue the dramatic music… The Worst Case Scenario The “Worst Case”Scenario is something that is unlikely, but still has a significant probability of happening – say, a probability of 5-10%. The point isn’t to focus too much on the probability, but rather the impact. Coming up with one good worst-case scenario can save you from thinking through a lot of individual unpleasant scenarios. The theory being, if you can survive a worst case or two, a lot of less unpleasant scenarios should be fine too. Unfortunately lots of normally bright and articulate people clam up when they try to think through worst-case scenarios. Our minds don’t like to dwell on unpleasantness. But anyone who has any experience behind them will most likely understand the usefulness of this exercise. Each personal situation will have it’s own unique risk areas and therefore appropriate worst-case analysis, but for sake of illustration consider this: I personally know several people who, during the last recession, lost their job and at the same time saw their investment accounts drop 30-40%. Throw in a particularly bad investment or two, a family member getting sick, and presto, you’ve got a reasonable worst-case scenario. If your planning can withstand this type of scenario then you are probably pretty far along. I think what-if scenarios and worst case planning are robust tools to bring to our financial thinking. Frequently, after you have reviewed enough different scenarios you will start to have an understanding of the key variables in your financial plan. Then, once you are done, you can sit back and enjoy a movie. I recommend Sliding Doors… Comments are closed.
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