A friend of mine who was a charter fishing boat captain used to write an article in his local monthly fishing magazine. One month his article was based on the randomness of catching fish. What day one chose to fish. Which route the captain chose to follow. Which way the wind was blowing, east or west. Much of someone’s enjoyment was based on how many of these random events broke in his customer’s favor.
I often think of random events in my own life. My wife and I recently celebrated our 31st wedding anniversary but the random events that put us together actually started 11 years beforehand. I was visiting some friends after college when another group of friends were there the same weekend. On Sunday morning as I was getting ready to drive back home, I ran into one from the latter group. We started talking about summer beach houses and I expressed interest in joining. Several month later a phone call led to a summer at the Jersey shore followed by a summer in Delaware which let to me moving to Northern Virginia where I eventually met my wife, ironically at a meeting to organize another summer beach house. If any of those random events had not taken place, my life and family would be completely different.
How does this random theory apply to investing? Back in the 1990’s the Wall Street Journal ran a pros versus dart throws investment contest where a investment pro would select five stocks for the next six months versus a five random throws of darts at a stock listing page. This contest ran for about 14 years and the pros outperformed the darts more than sixty percent of the time. The pros also beat the Dow 30 average slightly more than half of the time during that same period.
While all of life involves some randomness, having a plan increases the chances of success. Relying on the lucky choice is not a sound strategy. A plan helps to identify certain traits such as the amount of investment risk one is able to tolerate. Once that risk level is determined, the investor can invest in a portfolio that matches her risk tolerance. Having a long-term prospective helps the investor deal with the ups and down of the markets. This doesn’t guarantee success but a well-though out plan brings stability to the situation.
Without a plan or a roadmap, one could just get in the car and drive and eventually wind up where you want to be. It is more likely one will get there in less time and aggravation if they plan out a route first. The same holds true in investing and financial planning. Having a plan develops that roadmap. Plans, like life, need to be flexible because life will throw you curveball from time-to-time and one must be able to adjust.
James J. Denora, CPA, CFP®