Since this bear market started, I’ve concluded several articles by saying that we’ve planned for this.

When I say this, I don’t mean that we predicted what would happen this year or why – we didn’t.

I mean that we’ve planned for this in two ways.

First, we knew that the returns this year were possible, and second, we’ve included bad returns in our financial planning models to estimate the probability of you meeting your goals.

I still stand behind those meanings completely, but I’d also like to offer a little nuance that might be helpful.

First, the bond market return is outside of what we expected and, therefore, outside of our plans. Over the last 12 months, the bond market is down -15.7 percent through the end of October.

Our capital markets assumptions, which are based on historical returns back to the 1920s, assume a 4.2 percent annual return with a 4.3 percent standard deviation.

I realize that it’s probably a little early in the morning for statistics, but the standard deviation means that we would have thought that in 95 years out of 100, the bond market would return between -4.4 and +12.8 percent, and we’re pretty far out of those bounds.

The equity markets are well within their normal range, as unpleasant as it may be, so the question is how much you need in stocks to make a balanced portfolio fall within our expected range.

I’ve made some simplifying assumptions, but the answer is about 60 percent – anything less than that meant that the balanced portfolio lost more than we thought it would in a given year. That said, you have to go down to 40 percent equity to get more than five percent outside of our expected range.

So, I’d say that a bond-heavy portfolio is out of range, but I still think I can say credibly that we planned for this because a balanced portfolio is basically within range. We generally don’t advise clients to invest solely in bonds or stocks and usually prefer a healthy balance.

The second nuance that I’d like to offer to my view that we’ve planned for this is based on an article that I read a few months ago about the terminology that we, as an industry, use in the financial planning process.

The basic process is this: we enter your current circumstances into our model, make assumptions about your savings, spending, what markets and inflation might do, and run several thousand simulations to see how many ‘worked’ and how many didn’t.

Success is not running out of money, and a failure, somewhat obviously, is running out of money.

When meeting with clients, I typically say that the model assumes that you, as an investor, don’t make any changes throughout your life, even if the odds of success are going down.

In reality, most people make adjustments in the face of bad markets or high inflation, which is why we recommend running the model together once a year, and often inside of that cycle when times are tough.

The article made the point that instead of talking about the probability of success based on the success/failure rate, we should talk about the probability of adjustment.

The idea is that investors will almost certainly adjust their spending in the face of bad times. So rather than talking about the percentage of successes and failures as a binary outcome, we should talk about the percentage as the chance of having to adjust to circumstances as they evolve, which we often did anyway, but not in those terms.

So far, even as bonds have fared worse than our assumptions would have assumed, I haven’t seen plans where I went from being comfortable about the probability of ‘adjustment’ to being uncomfortable with the probability of adjustment.

Yes, most of the outcomes have gotten a little worse, but not enough to make me concerned. A number of clients have already made some adjustments, often on their accord, even as I say that the plans still look good.

When the markets recover, plans will start to look better, too, although we don’t know when that will happen at this point. I’ll say that we’ve planned for that too, when it happens.