Lesson II: Industry is not us. We are not industry.
As a corollary to Lesson I, we must concede that our relationships with the financial services industry are muddy and confusing. Many of us started as industry employees or started our careers with industry ties. Naturally, we still have friends there and feel those strong ties and loyalties. And many of us still get some income from industry checks.
What's more, it's hard to criticize the industry when it supports us. It gives us significant financial support for our membership associations and various gatherings. It sponsors our periodicals. At the end of the day, we need the financial services industry to manufacture quality products. To be fair, it mostly does that.
At that same day's end, we must understand the need to separate ourselves from the financial services industry. Our first loyalties must be to our clients.
Lesson III. You cannot diversify away from systemic risk.
I missed this one on the CFP certification test and have been pondering it curiously ever since. But the lesson has ramifications. It means you must be prepared and resilient. The trick is to identify the systems from which you cannot take refuge, grasp their risks, assess whether they can be managed and meet them head-on.
We are all pretty much stuck with the American economy as a baseline global system. If it goes down, we will mostly all go down with it, regardless of our risk-aversion gimmicks. In the meantime, we have options for where we live, how we invest and what sorts of skills we develop. If we cannot get away from certain risks by hedging our bets, we can try to mitigate and survive them.
Lesson IV: Mechanics and finance don't mix.
Economics is not a science. An economy is not a mechanism. Rather, economies more closely resemble gardens with capricious arrays of fruits, vegetables and grains and they less resemble machines predictably subject to the immutable laws of physics.
Because of this, economies necessarily comprise intriguing combinations of markets, statistics, customs, human evolution, individual peculiarities, business, contexts, luck and manipulation. But levers and drivers don't work as well as economists think they do. Mathematics is useful only for as long as we recognize it creates maps that ought not to be confused with actual territories.
For instance, economists thought they had come up with formulas proving that their derivatives worked in our real world. When they put their gobbledygook recipes on their computers, they forgot that the recipes themselves affected human activity-unfortunately forgetting Heisenberg's truths about the scientist's impact on his own experiments. Oops. In our real world, the money forces unleashed by derivatives, horrid lending practices, Ponzi schemes and "mug and run" hedge funds tempted, cajoled and seduced vulnerable humans, bringing ruin to millions. These forces came perilously close to bringing down our financial systems. The lesson commands: Thou shalt not confuse the precision of mathematics with the robust complexities of modern money systems and human nature.
To put a finer point on it, October '08 teaches that the financial planning arts must include our abilities to draw distinctions between mechanics and common sense. Economies are not machines subject to precise manipulation. People live in real time, where greed and selfishness crashes and recessions happen. People count. Levers don't work.
Lesson V: We must be very careful about our promises.
Financial planning is more art and craft than science. We do not have functional crystal balls, tea leaves, tarot cards or chicken entrails. We can help people understand their risks and opportunities and, in turn, help them make informed and appropriate decisions. We cannot protect them from life's vagaries or volatile markets.