Allocate then optimize

When planning out just about anything (creating a financial plan, managing your time, mapping out a project), you should first allocate and then optimize.

Allocation is about, “What do I do”. It is defining the steps required to go from where you are today and get you to where you want to be. Each step must be essential – if you can remove it or combine it with another step, do so. If not, don’t.

Optimization is about, “How do I do it”. It is looking at each step you defined when you allocated, and then figuring out ways to complete each step the best way possible (which can be defined different ways – sometimes by efficiency, sometimes by impact).

I’ve found people get messed up when they try optimizing before allocating, or start optimizing while they are still allocating. For example, financial planning is an allocation process – “What do I do to do what I want to in the future, and protect myself along the way?” It is a process of fact-finding, dreaming and discussion. If you start talking about specific products before you complete this process, you’ve started optimizing too early – you make decisions around the product rather than around the client. Same thing happens when you start talking about a specific fund before figuring out what overall portfolio allocation will work for your client.

Financial Guess

If I ask some advisors where they spend most of their time (or the time of their staff), it tends to be taken up with creating financial plans for clients, and showing how doing what they propose will get a client where they need to go. They set everything up based on this plan. This is a prudent practice.

It can also be dangerous.

I have seen many advisors who pour their all into a plan, to the extent that they see any critique of it or their methods as a personal attack. Question a specific product recommendation that comes out of the plan, and you might as well question their integrity and intelligence.

All financial plans are, in essence, a financial guess. All plans look into the future, and are at the mercy of time, the markets, dividend scales, inflation, mortality, income growth, human behavior and all other manner of variables that no matter how much effort you put into making reasonable assumptions will be eventually wrong.

Putting too much into the plan, placing too much faith in it, and tying your ego to it leads to defending the plan over time rather than constantly monitoring it, adjusting it and even throwing it out and starting over if needed. Tying your value to something that is at its core a guess and will not turn out exactly as planned creates a client expectation that cannot be met.

Planning is not a product. It is an ongoing process – a series of ‘best guesses’.