What do they have in common? Would you believe predictability?
If 98% of well-bred racehorses aren’t winners, why do most people look at pedigree before placing their bets? And, if pedigree isn’t a great predictor of winning horses, what is?
These are the questions that horse expert Jeff Seder asked and answered. A recent post on Nick Paggiulli’s site “Of Dollars and Cents” explains this, its connection to retirement and what’s behind it all – heuristics.
Paggiulii’s blog defines heuristics as “any approach to problem solving or self-discovery that employs a practical method, not guaranteed to be optimal, perfect, logical, or rational, but instead sufficient for reaching an immediate goal.”
Jeff Seder used heuristics to discover the ‘one big thing’ that best predicts a winning racehorse – check out this short interview with Jeff at his office, the racetrack. Reviewing all kinds of data on winning horses showed a common characteristic – a big heart was that one big thing.
In my February 6th blog, we saw that asset allocation was the ‘one big thing’ that determines the variability of returns in your portfolio. That may be true but asset allocation, along with related decisions, only accounts for 26% of your retirement success according to an article published in 2011 by the American Society of Pension Professionals and Actuaries cited by Paggiulli.
What accounts for 74% of your retirement success? The answer: how much you save.
Makes sense to me! I often include this stair-step diagram in my presentations while saying “if you don’t budget, you won’t save and if you don’t save, you can’t invest which means you won’t reach your financial goals (barring winning the lottery).”
Not to be too harsh but if you don’t save, your financial plan is dead in the water. And, if there’s a little voice telling you “but I can’t save”, think again, get creative. I’ve seen so many inspiring examples of clients saving a bundle on incomes that others would be hard pressed to make ends meet with.
Next up – how much should you save?