Insights
— Peter Lynch, Beating the Street
My first job out of college was on a Eurodollar Sales desk for JPMorgan on the floor of the Chicago Mercantile Exchange. Organized chaos: hand signals flying, voices competing, split-second decisions on millions of dollars. Someone once asked me what it was like. I said: “Think opera. Comedy, tragedy, crescendos, complete silence before an eruption. All the drama, all the intensity, all at once.”
After the floor, I moved to the institutional sales desk in New York. I worked with pension funds, hedge funds, insurance companies, and central banks, helping them execute their hedging and derivatives strategies using futures and options. The stakes were high, the pace was fast, and I was good at it.
What I didn’t realize until much later was that all of that experience translated directly into how I think about personal financial planning. Institutions and personal balance sheets are not the same, but they rhyme in ways that matter.
I build this directly into every client’s portfolio: The Three-Bucket Framework →
But there is one place people have a distinct advantage over even the best-run institutions: time. Institutions have compliance teams, risk managers, and investment committees forcing them to react, because their investors or their prospectus mandate it. You have the choice not to react at all, and to let time do its work, but only if your financial plan was structured properly.
“The best-laid plans of mice and men often go awry.”
Institutions hire the brightest minds: physicists, rocket scientists, mathematicians, former Fed economists, to build trading strategies of extraordinary sophistication. A single tweet can upend their work in seconds.
I saw this firsthand, again and again. I remember sitting with a client at the end of a year, looking at where the 10-year Treasury yield had started in January and where it sat in December. After a year of trading in and out of that position, burning through P&L and transaction costs along the way, the yield was exactly where it began the year. We had generated enormous activity and arrived at the same destination we would have reached by doing nothing.
Similarly, I watched markets swing violently on an economic number in the morning, only to close completely unchanged because an unrelated headline reversed the move by afternoon.
It wasn’t unusual for our Treasury strategy team to spend weeks in early December building an annual outlook, only for the market to have already traded outside their predicted range before Christmas.
Recently, the most respected forecasting institutions in the world assigned near-100% probability to an imminent U.S. recession. It never came.
The conclusion, year after year, was uncomfortable but unavoidable: people are very bad at making predictions. That is why I don’t build your plan around predictions about rates, growth, or what the Fed will do next. I don’t want you reacting to bad predictions. Instead, we give up a little near-term return in exchange for the liquidity to fund your life, and let time smooth out the market’s inevitable ebb and flow.
I learned this firsthand in business school, building pro-forma financial models to predict company growth and determine stock price ranges. The most important input in every model was the growth rate assumption. There is no accurate way to predict it. When other key inputs were missing, we were told to use a “plug.” A best guess dressed up as a variable.
I raised my hand and told my professor this sounded like hocus pocus.
She replied: “We prefer to call them forward-looking assumptions.”
Brilliant people, serious tools, and at the center of it all, a guess.
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