Is Financial Success Just a Matter of Luck?
By Douglas Goldstein, CFP®
Is financial success more about planning or luck?
In the book Rich Kids, Tom Corley discusses three different kinds of luck:
Random luck is the kind of luck we can’t control. Random good luck includes winning the lottery or getting an unexpected windfall. Conversely, examples of random bad luck include sudden illness or being struck by lightning.
Opportunity luck is good luck created as a result of your actions. You can create good luck by following positive “rich” habits that enrich your lifestyle and protect you from fiscal harm. An example of this would be getting an unexpected bonus from work, based on your diligent work. If you hadn’t worked hard and made yourself indispensable to your company, you may not have received a reward. In other words, your hard work created this piece of good luck. By following good practices, you are able to create your own good fortune.
Detrimental luck is the dark side of opportunity luck. This is when, as a result of following “poverty habits,” bad things happen. For example, poor money habits, such as overspending and not saving, can bring you to a financial crisis. If your bad financial habits mean that you don’t have an emergency fund, then you can easily find yourself in a financial crisis.
What is the best way to create your own good luck?
Random luck will never be within your control. But you can create better opportunities for yourself and head off potential crises by adopting rich habits. Following a positive lifestyle gives you a positive outlook and the tools to create better opportunities for you.
Acquiring good habits may be easier said than done. To learn how to create habits that really stick, listen to my podcast at www.richasaking.com/61.
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates.
How Modern Portfolio Theory Can Make You a Better Investor
By Douglas Goldstein, CFP®
Can “Modern Portfolio Theory” increase your investment returns?
Recently, on The Goldstein on Gelt Show, I spoke with the inventor of Modern Portfolio Theory, Nobel Prize in Economics winner, Dr. Harry Markowitz.
Dr. Markowitz explained various aspects of Modern Portfolio Theory and its impact on the individual investor. His theory explains how to construct an investment portfolio by optimizing expected returns based on the level of market risk. The goal is to help investors construct portfolios to maximize returns while limiting risk as much as possible. By combining various asset classes in one portfolio, Markowitz explains, the overall account may have a lower volatility and higher return than a portfolio that isn’t properly optimized.
Can theories really help investors?
When investors are faced with market upheaval, they often panic and lose confidence. When I asked Dr. Markowitz how to advise clients during turbulent markets, he spoke about the common mistakes that individual investors make:
“The chief error that the small investor makes is buying when the market has gone up and he assumes it’s going to go up further, and then he sells when the market has gone down and he thinks it’s going to go down more.”
He contrasted this investing model to using Modern Portfolio Theory to rebalance your portfolio to reflect market conditions. If used in the right way, MPT can be effective in turbulent times. When I speak with clients about their U.S. brokerage accounts or their investments in the Individual Retirement Accounts (IRAs), I realize that it’s difficult for them to look objectively at their own money. We all have our emotions tied up in our net worth. But when money managers use MPT to design a portfolio, it can help remove some of the emotional bias that might wrongly influence the way people invest.
To find out more about Modern Portfolio Theory, listen to our discussion at: http://www.goldsteinongelt.com/markowitz
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates.