Simplistic financial plans assume a smooth return that the client will earn. Why? No nefarious reason, but planners don’t know the future, so they either:
1) Assume an average rate as a baseline for calculations, or
2) Display the average, median, or some percentiles from a series of randomly estimated possible futures.
But life isn’t that way. Markets are lumpy. High and low returns happen more frequently than average returns. What’s worse, returns tend to streak over years and decades. So much for the Efficient Markets Hypothesis.
So what to do? Better to be like the great moral philosopher Linus van Pelt, who carried a candle at night, and his sister Lucy asked him why he was doing so. Linus replied, “It is better to light a single candle than to curse the darkness.” After Linus left, Lucy mused for a moment, and shouted, “YOU STUPID DARKNESS!”
Volatility is a fact of life, and even the volatility is volatile, with regions of seeming stability, and regions of extreme booms and busts.
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