The market’s response to the coronavirus had a stark effect on portfolio values. Less apparent, but more important, was how it reduced the probability that your financial plans will succeed in reaching your clients’ financial goals. Here’s an example of how devastating that may be and how you should communicate this to clients.

A retiree holding a 50/50 portfolio with an assumption of 8% arithmetic returns on stocks and 4% bond returns (with 1% asset management and investment expenses) has a 94% chance of successfully following a 3% rule withdrawal strategy over 30 years. In other words, there is a 94% probability that they can spend $30,000 at age 65 and then increase this spending amount by a 2% rate of inflation annually through the age of 95.

But, after the first day of retirement, this probability is no longer 94%. The retiree realizes a daily random return that changes the probability of success. Returns above market expectations will increase the probability of success. Returns below expectations will reduce the probability that the client will successfully be able to maintain their desired lifestyle.

These incremental changes in probabilistic goal attainment are inevitable in any portfolio that invests in assets with future uncertain payouts. It is up to an advisor to understand these changes and decide when and how to communicate their implications to a client.

Anil Suri, head of portfolio construction and investment analytics at Merrill Lynch, once used the analogy of Google maps to explain probabilistic goal attainment using stochastic portfolios. When I input my destination, I get a highly precise estimate of the arrival time based on the amount of current traffic. But Google cannot anticipate an accident that hasn’t yet occurred. Halfway to my destination I receive a course correction recommendation that gets me to my desired destination most efficiently after factoring in new information.

This analogy is important because many advisors view the original estimate of probability as overly static. When market conditions shift, they assume that if their client “stays the course” and patiently maintains their portfolio allocation and spending strategy they will be fine in the long run. After all, when developing the investment policy there was a 94% chance of success.

If the accident had occurred prior to departure, the estimated length of my trip may have been five minutes longer and would have included a different route. If retirement was guided by Google maps, a retiree facing falling interest rates and a drop in equity values at the beginning of retirement would receive a course-correction warning. The retiree will now need to spend less and perhaps invest differently in order to maintain the same probability of success.