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How Our Plan Assumptions Save Us From PanickingIf you kept your money in the stock market this summer, you’re likely feeling pretty smart now. The start of August was rough for stocks as the Russia-Ukraine standoff, the Israel-Gaza conflict and terrorist group activity in Iraq all flared again. While serious problems remain in each of these regions, their impact on the U.S. economy so far has been limited. … Not to be outdone, the S&P 500 set a new all-time high of just over 1,992. It’s the 28th record close this year for the popular index of U.S. stocks. Many Americans invest in funds and ETFs that mimic the investments of the S&P 500 Index. Investors Cheer: S&P hits all-time high, CNNMoney, Heather Long,  Aug 21, 2014.

I keep seeing comments such as “they lost 40% of their portfolio during the last stock market crash!”  Huh? They only lost something if they pulled out of the market.  If they stayed in the market, it had all come back, just like it had in the past. If over the years the market grows by 8% then when things go wonky, we realize that this is just normal variation from the 8% long term trend and we should be patient and wait it out.

So, how can we use this notion in a project?  Let me illustrate using Quicken as that is the primary tool I use to track my financial details. (Let me also add that managing my own personal finances closely using a tool like Quicken made it easy to later manage financially large projects.)

Using the Investing/Portfolio view, I can see how my portfolio is doing.  It also shows me my three and five year annual rate of return (i.e., past performance).

See Past Performance Is Not Guaranteed Except In Project Management

If I backed up to mid October 2007, my portfolio showed being up 17% for the year, 15% a year for the last 3 years, and 18% the last 5 years.  Pretty good when I was planning on a long term rate of return of only 8% a year!  I even told my wife we needed to start spending more money as it was warranted.  Now I did realize intellectually that it was a bit high.  I recall specifically thinking about if it is this high, it needs to come down.  When in early 2008 it started to drop, I was not concerned at all.  It was normal, expected, had to happen.

In this case however, it was a once in 50 year type drop, so while unfortunate, it is one of those things that can happen.  I took it to be just that, an inevitable drop and I did not get out of the market. Stayed all in.  Yes, for awhile I started to worry about everyone saying “the world has changed, it won’t do what it has done in the past!”

I stuck with my original planning assumption that I only expected to get 8% a year over the long run.  My financial plan in Quicken reflected that.  So if I really believed this planning notion, then I just needed to ride out the current situation.

Now, it is possible with time that I might pick another number than 8% for long term growth.  In fact, the typical number being thrown around at the time seemed to be over 10%, but I stuck with 8% as being a more reasonable long term goal. How did I know that?  It is a matter of just keeping myself in the flow of chatter on the economy and long term performance.  You should reach a point where you feel comfortable with finding a number you can plan on.

For similar see Extreme Project Management Lessons From the Stock Market

Sometime one hears about the “lost decade” or some-such. While I’ve not dug in to verify my hunch, generally I suspect most of these “lost” times are based from a high point through a low and back to an equivalent high point.  So again, if true, who cares?  It is not relevant to the long term trend.  They are just picking the worst possible interval to get attention.

If they told me when the longer term growth would get back to something like 6, 8, or 10% that would be good info for me.  Otherwise, the talk about how long it will take to get back to some past high point is just silly.

So my financial planning approach:

  1. Plan my finances and pick a few planning assumptions (e.g., 8% average rate of return, 3% inflation, etc.).
  2. Check, using a tool such as Quicken (or ESPlanner, another favorite of mine) to see if this supports reaching our goals (e.g., financial independence).
  3. Endure as the economy and market does it’s dance, analyze what is going on in the context of those planning assumptions.  Don’t let the hype drive me somewhere else.   Use my assumptions to steer my ship, not the noise from the media that sells itself by finding and hyping all the extremes it can find. What I’ve given myself is a touchstone.  Something to anchor my high and low feelings.

I’ve been surprised at the number of financially smart people I’ve talked to who seem disturbed by the notion of using our planning assumptions to test how the plan is going and drive what to do next.  I ask them if they didn’t trust their assumptions.  They say no.  I ask then why not use them in a down market.  They look confused and don’t offer any real explanation.  The most I get is to hear the fear that maybe things have changed and hence all the assumptions don’t apply any longer.

Yes, the world might change.  Drastically.  If it does, I personally suspect that no amount of “tactical” moves will overcome something so dramatic and drastic as a truly fundamental change.  I know that prior to another downturn I made another strategic decision that made a huge difference in my finances  Was it to pull out of the market?  No.  It was to pay down debt.

In this case I paid off my mortgage (actually, three of them, the other two were rental properties).  Most financial planners I’ve read or heard lately didn’t think much of the notion of paying off a mortgage when the market was on its way up.   Why not put the money in the market and make a lot more?

This kind of “dollars only” approach to making a decision is clearly unwise.  Yes, business does this all the time.  However, it is always smarter — I will insist — to do something for multiple good reasons.  If the only reason is that I make more money right now, then that is a failure mode in my way of thinking.  I try to find several reasons for what I do with my finances.   If it makes money and helps save the world — that is better than it makes money only.  If it makes money and it makes you or your company look good, OK that works too.  I try however to balance what enriches me with what enriches others (and I’m not talking about the shareholders).  If nothing else, it is just more efficient, more bang for the buck, than dollars only.  It also can save my bacon when the dollars don’t pan out and I need help to recover.

Consider For Lasting Success Find A Higher Purpose

While this example has been based upon personal financial planning, the same holds for our assumptions when we make a project plan.  If we believe in the assumptions, such as how fast we’ll resolve quality issues — because it is based upon historical performance — then take a chance and rely upon it when a big issue arises.  The chances that our organization has changed so much that things will be different from last time is pretty rare (but not impossible). It is amazing how often I could just guide an organization’s reaction to a problem, feeling little stress myself, because I pretty much knew how it would pan out.  With good plan assumptions, based upon organizational past performance, the odds are in our favor that things will work out as expected.

For more on facing a project crisis see Hurry, But Do Nothing Different and The Trend Is Your Friend Or Foe

Are your plan assumptions things you can rely upon to manage your project during a crisis?

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