Why You Shouldn't Just Focus On The Probability Of Success
In a recent article for Forbes Finance Council, Covisum Founder and President Joe Elsasser, CFP® suggested that focusing on a probability of success is a poor method for moving people to make the best possible financial decisions.
Many financial advisors incorporate Monte Carlo simulations, a technique used to demonstrate risk and a range of possible outcomes, into their financial plans. Monte Carlo simulations can help consumers understand that a variety of outcomes are possible and avoid a false sense of security, but focusing on the probability of success can minimize the consequences of failure — an equally important consideration.
"If the focus of financial planning is to move people to the best possible decisions, advisers need to recognize that a probability of success is really a poor mechanism to do so. The reason: People don’t experience “probabilities” — they experience events. Focusing entirely on the probability of success tends to mask the consequences of failure, which for most people is a critical consideration."
Evaluating the most common risk events, such as a significant market decline early in retirement or a long-term care event, is important. Consider each event and discuss with your client whether the consequences of failure are acceptable to them. If necessary, adjust the plan to bring those consequences into an acceptable range and find balance by utilizing different investment or withdrawal strategies or insurance.
You can read the article in its entirety in Forbes.
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