As a kid, the highlight of every field trip to the Pacific Science Center was watching the "ping pong ball" demonstration of probability theory. Like a massive Pachinko game, thousands of ping pong balls clattered down through a series of pegs, bouncing around until finally hitting the bottom of the display case. The final result of this ping pong chaos would be a stack of balls in the shape of a perfect bell curve — peak in the middle, tapering to the sides. I’d think, “What the heck? How’d that happen? Hey, where'd the rest of my class go?”
To the extent that financial matters are left up to chance, our financial future becomes more dependent on random events. Like a ping pong ball working its way down, we could end up, in a financial sense, wherever the laws of probability dictate. Sensing this, many people are motivated to take some control of their lives.
Most people (and financial planners) use a traditional forward-planning approach, in which the key is to anticipate events and prepare for contingencies. This involves a reactive series of steps: gather information, list possible courses of action, select the best one, and then implement the program.
Art of War
What we advocate is a "backward planning" approach, similar to that used by military strategists to plan and coordinate operations. Backward planning involves starting at a target point in the future and working back to the present.
By starting with a desired outcome, you more clearly see the steps needed to get there. This approach provides a soldier with a clear view of the military objective and actions appropriate to completion of the mission (if this sounds a lot like financial planning, it is).
However, most financial planners instead rely on projections created in a linear fashion -- straight, upward-curving lines. Then, they sell their clients on investments with historical risks and returns based on these projections, and hope it all works out. This approach can be a set-up for failure, especially during market downturns, when investors start to question the reliability of those straight, upward-curving lines, and then bail out at the bottom.
Take the time to think through your financial goals. Once you can articulate the goals that matter, look for an investment program that seems in harmony with your preferences and comfort level.
Don't get caught up in the short-term noise of the markets. Instead, focus on a savings and investment program that can provide the money needed to fulfill your back-end goals.