Sunél's Blog | What role does luck play in planning

Sunél Veldtman, | 10 May 2024

Luck plays a big role in the financial outcomes of individuals. This may sound shocking or defeatist, but it is the reality.

In contrast to large institutional funds, which can de-risk outcomes by making many small decisions over long periods, individuals often make a few large decisions that can substantially change their financial outcomes.

Consider this:  For most individuals, purchasing a residential property may be one of their biggest financial decisions. It is expected to give a good return.  However, contrary to popular belief, returns on residential property can be fickle. They can be impacted by random factors such as the policing in the area, changes in building restrictions, or the investment climate in the country at the time of purchase. Property owners in Johannesburg have first-hand experience of the real decline in property values over the past few years.

Let me illustrate further. Two sets of retirees bought very similar properties on opposite sides of the same hill in new developments. The first couple were lucky and made a substantial profit when they sold, which enabled them to move to a sought-after retirement village. The second couple saw little growth in the value of their property over several decades and could not afford to buy a home in a retirement village. Not so lucky.

The choice of employer even falls within the parameters of luck and is often an important determinant of an individual's wealth outcomes. Another example: Two professionals decide to join two different large national retail companies at the same time. Both receive share options as part of their remuneration. One employer’s shares quadruple, and the others stagnate. In the last decade before retirement, this choice becomes the difference between having sufficient retirement capital or not. This example could describe the experience of Shoprite and Pick ‘n Pay employees over the past decade.

This issue of luck begs the question, ‘How can we protect ourselves against being on the losing end of the luck of the draw in our financial planning?’  Acknowledging luck is a first step. It means that you must allow room for adverse outcomes in large financial decisions. Ask questions like, ‘How will a worst-case scenario impact my life? How big is this decision relative to my overall wealth? How can the timing of this decision determine my financial survival?’

Furthermore, your base case financial plan should not hinge on any one asset. It comes down to the basic principle of diversification: Diversify against the impact of luck.

It doesn’t matter how many measures we put in place; we cannot fully protect ourselves against luck. In the end, all we can do is assess our resiliency and flexibility, so that we can adjust when luck has not been on our side.

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Kind regards,