Doing some reading recently, I came across US Congressional Budget Office (CBO) forecasts made in 2002 for the US economy in 2012 (a ten year time horizon).
Now you would think that an economy is equivalent to a very large “tanker”. It doesn’t move much. Growth rates don’t vary much over time, there are cycles, but it all “evens itself out”.
Let us have a look at a couple of stats and see how the CBO did.
They expected that:
US Tax Revenue would be $3.3Trillion – it is $2.2Trillion (a 50% miss)
Public Debt as a percentage of GDP would be 15.5% – it is currently 72.8%
The Federal Budget would be running at a $500Billion surplus – it currently is a $1.12Trillion deficit.
I’m going to give them a fail!
In developing plans we are required to do “forecasts” but I will give you an experienced warning – overly rely on them at your peril! For example, if you are relying on 10% growth in your asset class and you come in at 6% – you end up with 31% less over 10 years – that’s a big miss.
Develop a plan based on solid principles and focus on doing the right things. Save your surplus cash flow, minimise costs and taxation, invest in a growth asset or three, and diversify in the event one asset class flounders and keep watching and refining your strategy. Use assumptions that are basically sound, but accept some uncertainty in your forecasts. Plans should be established but then adjusted regularly, like a sailor trimming a sail.
Always remember, just because you can put it on a spread sheet does not make it happen! Plan and monitor accordingly.
