Investing’s Dirty Secret: Luck
Aug 20th, 2010 by Carlos
I’ve read a lot of books about investing, and the general assumption that’s made for long-term investors is that the market will return an average of 8% per year. Some people get greedy and punch 10% into their compound-interest calculators, but if you look back far enough at the history of the overall market, you’ll find 8% is a much more accurate average.
Besides, it’s better to lower your expectations in case you’re wrong. When you’re 75 and out of money, it won’t do you any good to whine that your math was wrong.
The difference between 8% and 10% (and over time this is a HUGE difference), however, will rarely have anything to do with how good we are at picking stocks or knowing when to buy and sell them. As this Yahoo Finance story says, it’s all about luck. The article’s subtitle says it all: Start early, save aggressively, and hope.
A study by Ibbotson Associates found that the amount of money you make in a given 30-year period changes dramatically.
For instance, $100,000 invested in 1946 would have grown to about $1.15 million in 1976, but the same amount invested in 1976 would have delivered about $2.27 million in 2006.
If you’re lucky, you’ll be alive during a 30-year period where the stock market in general has “a good run.”
It might be pretty scary to think that your retirement is more dependent on luck than on your stock-picking prowess or your ability to re-balance your portfolio every year. But hey, that’s investing for you.
Even Warren Buffett hints at the important role that luck plays in our lives, and he’s one of the greatest stock pickers in the world.
Beyond Investing
The more I thought about this, the more I realized that luck plays a HUGE role in our lives. And that’s kind of scary. What if you work hard, do your best, say all the right things, make all the right moves, and you don’t get any luck coming your way? What if you’re struck with insurmountable bad luck that keeps you from improving yourself and your life?
It’s a depressing thought.
When I look back at the jobs I’ve had and the bosses I’ve had, I consider myself incredibly lucky. They have each contributed to my growth as a person and as an employee—I wouldn’t be where I am today without them.
For example, three years ago I was working in publishing at a job I didn’t really like. But my co-workers were awesome and my boss was the best. The job made me realize that I needed to get out. So I did: I got a job as a writer (thanks mostly to this blog) for a company that was starting a new site that taught people how to invest.
That situation propelled me into something totally different: first as an ad copywriter (which is/was awesome) and then a position as a product manager. If I would’ve applied for a job anywhere else as a product manager back then, I would’ve gotten laughed out of the room—I didn’t have any experience and I didn’t even know what that was. But because of some of the work I’d done in my own projects (this blog included), I had a teeny little sliver of experience in my background.
And my bosses had faith in me. So they took a chance and gave me a shot—without that chance I would’ve been let go a long time ago.
I was lucky.
What Can We Do?
The cliché phrase here is to be ready to receive good luck. Just like a minor-league baseball player has to be ready to take advantage of getting called up to the big leagues to make the most out of the opportunity, that’s what we all have to do.
We need to be in a perpetual state of readiness.
Or as a guy on MTV once said, “If you stay ready, you ain’t got to get ready.”
Image by kaibara87
