As an investor, you’re in the business of predicting the future. No matter how good you are at analyzing business trends and projecting consumer behaviors to come, there is a certain amount of luck involved. After all, not every trend lasts forever, yesterday’s innovators can get displaced by tomorrow’s disruptors, and even great ideas can get sidelined if the money runs out before they can get a foothold.
You can’t perfectly predict the future, and some of your investing ideas will not work out. What you can do, though, is set yourself up so that you can benefit more from the good luck that comes your way in the market than you suffer from the bad luck that will also head your way. With that in mind, here are three ways to make your own investing luck.
1. Don’t plan to trounce the market
While we would all like to earn tremendously strong investing returns, it’s dangerous to base your investing plan around the belief that you will trounce the market. Instead, it’s a smarter idea to build your plan around an assumption that your returns will trail the market’s long-run returns. That way, you are more likely to meet or beat your expectations than you are to trail them, and thus you’ll feel the benefits from any outperformance you do see.
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To illustrate, let’s say you’re starting from scratch with a goal to become a millionaire within 20 years. If you plan around earning a market beating 15% per year, you might think investing $667.90 per month would be enough to get you there. If, on the other hand, you plan around a more modest 8%, you’d want to try to figure out a way to sock away closer to $1,697.73 per month.
In either case, if you hit your plan, you’ll be fine — but what happens if you aim for the 15% returns but only hit 8%? In that case, you’d wind up with only around $393,400 after 20 years — far short of your goal. If, on the other hand, you invested enough to reach your $1 million target with 8% returns but instead did reach that 15% goal, after 20 years, you’d wind up with a whopping $2.54 million.
That way, you weren’t counting on trouncing the market to wind up with a million-dollar nest egg, but if you did manage to do so, your rewards would be that much sweeter. In essence, by doing so, you’re putting luck on your side instead of relying on it just to hit your goal.