Monday, November 2, 2015

The riskiest gamble you can take is to not plan

As a financial adviser I continually like to remind investors that there’s no such thing as a sure thing. You can look to the past to see how an investment has performed, but as the cautionary disclaimer often warns, past performance is no guarantee of future results.
Over the years, we’ve heard many fallacies about sure things. In the investment world, some recent examples of certainty claims that didn’t quite pan out are: real estate can only go up in value; day trading tech stocks will make you so much money you’ll be able to buy your own private island; gold can only skyrocket in value; and most recently, oil can only increase in value.
At one time or another, most of us have seen commercials implying the above statements are fact. They are not. Just as it is with life in general, there are definitely no sure things in the world of investments.
Locally, we recently witnessed the near impossible. A couple of weeks ago Michigan State made an unbelievable comeback against Michigan in the last 10 seconds of the game. According to the statistical firm Massey-Peabody Analytics, the probability of Michigan State winning the game was .02 percent.

Said another way, the likelihood of Michigan winning with only 10 seconds remaining was 99.98 percent. But whether you’re a Wolverine or Spartan fan, you are now certainly aware that more than a 99 percent probability does not mean 100 percent certainty.
That being said, regular readers of this column know that I’m a strong proponent of using math and statistics to enhance your investment results.
Statistically, would you rather have a high probability for achieving your financial goals, or hope to reach those same goals by hoping for a statistically improbable event to occur?
The practice of making consistent contributions into your retirement plan is a good example of improving your probability for a successful retirement. For example, by saving $500 every pay period and taking advantage of compound interest, you can amass a sizeable retirement nest egg over a 30-year work career.
Statistically speaking, I’m pretty confident that the person in the example above will have a much, much larger retirement nest egg than someone that gambles $500 at the local casino every pay period for 30 years.
One of the things that concerns me is that far too many people are counting on a miracle win for a successful retirement. Don’t be swayed by the Spartans near impossible victory. The actual statistics for anyone getting a financial windfall are nearly impossible to determine. And yet too many still reach for the highly improbable by purchasing lottery tickets or squandering paychecks at the casino.
In other words, gaming is well beyond entertainment for some. They’re grasping for a nearly impossible result in order to achieve their retirement dreams.
What we all saw on the football field in Ann Arbor was about as improbable as you’ll ever see in sports. True, there are no real guarantees in the world of investing either. But rather than hoping or gambling on the near impossible, it’s wiser to put statistics in your favor.
It may not always work out as planned, but the alternative of counting on a near miracle is no way to achieve your financial dreams.

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