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Don't Let Perfect be the Enemy of the Good

Investing Estate Planning Insurance General

Mikey: And it says, uh, here, ‘Breakfast anytime.’

Waitress: That's right.

Mikey: I'll have the, uh, pancakes and the, uh, age of enlightenment, please.

 [A few beats later]

Mikey: Excuse me. We have... We're in a little bit of a hurry.

Waitress: Hang on, Voltaire.

 -- Swingers, 1996


In his Dictionaire Philosophique , Voltaire referenced an Italian proverb that, in modern English, has evolved into the phrase “The perfect is the enemy of the good.”[1] Efforts towards achieving perfection usually end up as disappointments, because perfection is ultimately unattainable. And if we strive only for perfection, then we’ll often leave tasks or projects unfinished or feel like we've failed.

This concept has profound implications for at least three financial planning components:

Estate planning

I’ve seen numerous clients get stymied with their estate planning efforts because they can’t think of the perfect person to serve in a particular role, or they can’t arrive at a distribution of their assets that accomplishes every single goal and addresses all possible contingencies. 

For example, one client couple had trouble figuring out who would be the contingent guardian for their minor children if they both died in a common accident. They each had family members who they were considering, but they weren’t 100% sold on their choices.  Another client couldn’t decide on how much certain nieces and nephews should receive at their deaths: should it be 10% of their IRA? Or should it be 15%, because one side of the family was better off than the other? 

I don’t want to diminish the emotional challenge of these decisions because they aren’t easy. But guess what? Being dead is already pretty bad. It’s going to be lousy for just about everyone involved. Having the “perfect” estate plan isn’t going to make that go away. But not having any estate plan because you can’t figure out the perfect one will make things a lot worse. I typically advise folks to find something they can live with now to at least get documents signed, and that they can always go back and revise things later if they come up with the “perfect” choice.

Life Insurance

When I first investigated life insurance for myself when my first child was born, I started using all of the calculations I’d learned in financial planning school to determine the exact amount I needed. I soon realized that those calculations were good for the day of my application, but that a year or two later that calculation was going to be very different. Was I going to need to re-figure my life insurance needs analysis every year to have exactly the right amount?

I’m sure there are insurance agents who would love folks to do this, because more policies end up with meaning commissions. But this is an exercise in futility. Do you know the exact trajectory of your earnings, and how much you might need to replace? Is your career path (or that of your spouse) super stable and predictable? Are you really prepared to go through the life insurance calculation every year or every few years to get the amount exactly right?

I’m guessing the answer for most people is no. Instead, while you never want to pay for more than you truly need, it may just be easier to get a term policy with a sufficiently high benefit when you’re relatively young and just leave things alone. Obtaining insurance when you’re young and healthy typically ensures a low cost, and the term nature of the policy will mean that your premium never changes for the length of the term. The high benefit amount will mean peace of mind in the face of an uncertain future. And if you get to a point where the insurance is clearly overkill or even no longer necessary, you can reduce your death benefit or simply stop the policy. It’s always cheaper to reduce your benefit than to increase it, especially when your odds of dying prematurely have gone up as you’ve aged.


Asset Allocation

Building the perfect portfolio became an obsession in the finance industry once computing power increased to the point where folks could run millions of optimization simulations. The idea was that if you had the right inputs, you could build a portfolio that was perfectly optimized to deliver desired expected returns with minimal volatility.

And in truth, this was possible. The problem was that all the optimization was backwards looking since that’s where all the data came from. Unfortunately, the perfect portfolio from 20 years ago probably isn’t going to be the perfect portfolio for the next 20 years. Optimization requires knowing expected returns, volatility, and the relationship between asset classes. The chances of getting all three variables right over a long time frame is basically zero.

Additionally, the portfolios that the optimization formulas spit out wouldn’t pass many tests for diversification (or compliance!). Unless told otherwise, the formulas would overload the best performing asset class over the past time frame. To make things more realistic, advisors had to “constrain” how much or how little could be put into any asset class, which by its very nature already leads towards the road of the “good” rather than the “perfect.”

So rather than regularly optimizing a portfolio using inputs that at best are educated estimates and at worst are outright guesses, the “better” approach is to build a portfolio using a set of principles (such as diversification, low costs, slight emphasis on those dimensions of stocks that have led to modestly better returns over long periods of time, etc.) and accepting that it won’t be perfect. There will always be a better portfolio. But if you can build one that you can live with, that’s going to be your best long-term strategy.

[1] The actual translation is “The best is the mortal enemy of the good,” but we’ll take the underlying lesson and go with a translation that is close and good enough.