A pilot wouldn’t lift off without a flight plan. An adviser wouldn’t work with an investor without a financial plan.
When explaining the purpose and benefits of a financial plan, comparisons are often made with flying.
David Jones (Dimensional Fund Advisors) has provided us with a brilliant analogy based around a conversation he had with his nephew at a wedding.
Take it away David…
Planning your trip
At a recent family wedding, I had a long, pleasant conversation with my nephew, Dan, who has been a commercial airline pilot for a few years.
After he told me a few amusing stories about some of his more hair-raising experiences, we got into the subject of finances and his somewhat rueful admission that he should be doing more to prepare for the future.
“But,” he said, “I just find it all so confusing; I just don’t know where to start or who to trust.” Does that sound familiar?
“Relax, Dan,” I told him. “It’s much more straightforward than you might think. You need to take a structured approach.”
“In fact,” I said, “planning your financial future is very similar to what you do for a living.”
“Really? How?” he asked.
“Well, before you even take off on any flight, what’s the first thing you must do?”
“File a flight plan.”
“And what’s on the flight plan?” I asked.
“All the information, like the starting point, the destination airport, proposed route, the number of passengers, the fuel you’ll need, hazards you need to consider, weather, contingency plans. All of that stuff.”
“Right! Just like a financial plan,” I said. “You need to know where you’re starting from, where you’d like to get to, over what time, how much fuel—I mean savings—you’re going to need, and some contingency planning in case it doesn’t work out exactly as anticipated.
If you work with a good financial planner, they take the time to understand your desired destination and put together the plan to give you the highest probability of getting there.”
Checking the fuel gauge
“Now, let’s think about your office. By which I mean the flight deck. Whenever I’ve looked through the cockpit door and seen all those instruments you must deal with, I find it scary.
There’s just so much information you need to process. How do you even know what you need to look at? You must have a compass, an altimeter, an attitude indicator, an airspeed indicator—I know they are all important, but what’s your most crucial dial?” I asked.
“That would be the fuel gauge,” he said without hesitation. “In fact, after taxiing, takeoff, and landing, most of the work we do during a flight is spent on fuel calculations and contingency planning, as most of the time, the aircraft is on autopilot. But, of course, there are always times when we have to make adjustments.”
“Again, just like financial planning,” I said.
“You can plan the best flight ever, but the plane isn’t going anywhere unless you have enough fuel to get you there and allow you to deal with unexpected emergencies along the way. But the key thing, like on the plane, is to ensure you put enough fuel in the tank. In a financial context, that’s your commitment to saving regularly enough.
But even if you do save in a highly disciplined way, it’s unlikely that you will be able to achieve the sort of returns you need for a successful outcome without investing some of your funds in the stock market.”
Dealing with turbulence
“But that’s the scary bit, isn’t it?” Dan complained. “You can lose a lot of money if the stock market crashes.”
“Well, yes and no,” I replied. “Again, your world gives us another great analogy. Every day you are flying people around the world and if you were to survey the people on board, what are you going to find? Some of them have a fear of flying. Well, most likely it is not so much the fear of flying, but a fear of crashing!”
“True,” he answered.
“Then, during the flight, you experience some turbulence. What does that do for our aerophobic? It confirms all their worst fears about getting on the plane in the first place.
But for you, as a pilot, is turbulence a problem?”
“No, it’s just a normal part of flying. Most of the time, you aren’t really dropping much, it’s just the sensation that makes it feel like you are. Like on a roller coaster at the fairground. Plus, modern planes are more than capable of handling even extreme turbulence,” said Dan.
“So, what do you tell people?”
“When the seat belt sign is on, stay in your seat with your seat belt fastened.”
“Because?”
“Because the people who are going to get hurt, or who are going to hurt others, are going to be the ones out of their seats,” he said.
Do you trust your pilot?
“Yet again, Dan, you’ve just described the typical investing journey as well. Along the way, you are going to experience turbulence—or volatility—and as financial experts, we know to expect it and deal with it.
But to the uninitiated, it’s scary and confirms all their worst fears, especially about crashing. The answer, again, is to stay in your seat, and the one thing that can help here is the reassuring voice that comes over the intercom:
“This is your captain speaking; just a little turbulence, folks; things could be a little bumpy for a while, so we do ask that you stay in your seats while the seat belt signs are on.”
The same thing applies when the markets are looking scary—the voice of calm and experience makes all the difference.
“So, Dan,” I said, “if you think about financial planning like your day job, you’ll find it easy to grasp. In simple terms: Have a plan, put fuel in the tank, don’t worry about turbulence because it’s all part of the journey, and work with someone who understands the importance of regular communications and calm reassurance.
And that is the point. Just as I wouldn’t expect to fly myself on holiday, you shouldn’t expect to do this all on your own. A good planner will help you get where you want to go.”
“Since you put it like that, Uncle David, it does seem pretty straightforward. I guess the next question would be: ‘Where do I find someone?’
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