Is Our Success Due to Skill or Luck?

Kentucky’s own Henry Clay reportedly coined the phrase, “self-made man” when describing Benjamin Franklin during a speech in the U.S. Senate in 1842. His meaning of the term referred to an individual who rose from a poor background to achieve great prominence in business, academia, politics or other areas by employing perseverance and hard work to overcome “his” humble beginnings. You know, someone who pulls themselves up by their own bootstraps…which is physically impossible, if you really think about it. But, what role does luck play in someone’s success story? Or lack of success story?

Morgan Housel, in his book, The Psychology of Money, tells the story of Bill Gates, founder of Microsoft and the role luck played in his success. To summarize, Gates was one of about 300 high school students in 1968, out of roughly 303 million the same age around the world, who just happened to attend a high school that had the foresight to buy a computer for its students. Yes, he was brilliant and skilled, but he also benefited from the luck of having “a one in a million head start by going to school” where he did.

Conversely, many of you probably remember the baseball player Roberto Clemente. Playing for the Pittsburgh Pirates and hailing from Puerto Rico, clearly Clemente was extremely fortunate to have been discovered as the talent he was. Tragically, however, he perished in a plane crash in 1972 while delivering supplies to his native country after a devastating earthquake. His extraordinary skill, strong work ethic and empathy to his fellow Puerto Ricans’ suffering couldn’t overcome one moment of bad luck.

So, I’m sure you’re wondering what this all has to do with retirement planning and investing. Believe it or not, luck can play a significant role in our overall financial success.

Let’s look at the luck of when we retire, for instance. The NASDAQ stock market index trading mostly technology stocks gained over 500% in just five years between 1995 and 2000. So, if one held $500,000 worth of NASDAQ stocks in the year 1995, it would have grown to about $2.5 Million by 2000. Cashing out, or mostly out, and retiring then would have been a lucky stroke!

If you had planned on retiring in 2002, however, your original investment of $500,000 would have risen spectacularly and then crashed along with the market starting in March, 2000 until hitting bottom in October, 2002. So, rather than starting retirement with $2.5 Million, you would be left with a value of just $579,750 when it was time to retire. It would take another 15 years before the NASDAQ regained its peak.

Fortunate things and unlucky things happen to all of us all the time. When planning and investing for our futures, the secret to dealing with things outside our control is by arranging our financial lives in a way that we get to keep playing until the odds are back in our favor. Living beneath our means, saving and investing the rest, and investing our portfolios in a manner appropriate for our time horizons are ways we keep in the game despite the circumstances.

Steve Byars, CFP®