Monthly Investment Message: January 2016

Personal Finance February 01, 2016 Print Friendly and PDF

Barbara O’Neill, Extension Specialist in Financial Resource Management

Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

Investing Lessons from American Pharoah

In October 2015, American Pharoah (AP) became the first horse ever to win the “Grand Slam” of thoroughbred horse racing: the Triple Crown (Kentucky Derby, Preakness, and Belmont Stakes) and Breeder’s Cup Classic. AP’s story is a positive antidote to negative reports about random shooters, terrorism, and politics and a great subject for a future movie. Just like Seabiscuit in 1938-1940, there was triumph (Triple Crown) followed by a setback (Travers Stakes loss) and a comeback (Breeder’s Cup Grand Slam victory). AP’s success story also provides valuable lessons for investors:

Start Small- AP achieved success one race at a time. Similarly, wealth accumulation is possible over time via a series of small steps such as saving for retirement in a 401(k) or 403(b) plan via payroll deduction or participating in a 52-Week Money Challenge and ramping up savings by $1 a week over the course of a year. A worksheet for tracking Challenge deposits can be found at http://walton.ifas.ufl.edu/fcs/files/2014/01/52-Week-Money-Challenge.pdf Another way to “start small” is to invest what you can afford now in an employer retirement savings plan (e.g., 401(k), 403(b), and Thrift Savings Plan) and increase your deposits as income increases (e.g., from 3% of gross pay to 5%).

Set a BHAG- Expand your horizons, as you achieve success, with a “big hairy audacious goal” or BHAG. The Grand Slam of thoroughbred racing wasn’t even an actual possibility until AP won the Triple Crown, which hadn’t happened since 1978 (37 years). The Breeder’s Cup did not begin until 1984, so previous Triple Crown winners did not have an opportunity to pursue the Grand Slam. It was a first of its kind event. Just like the Grand Slam goal was unique to AP, individual investors can aspire to personally meaningful BHAGs of their own.

Develop an Action Plan- AP’s handlers developed a series of plans to achieve success including carefully timed training and travel schedules. Similarly, action plans are necessary to achieve personal finance goals. The best way to achieve a financial goal is to break it down into a series of action steps. For example, if someone wants to accumulate $50,000 in 10 years for retirement, this breaks down to $5,000 per year and $192.30 per bi-weekly paycheck. If employer matching is available, some of the savings can come from there. This worksheet can help you calculate required monthly deposits for investing goals: http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf

Work Hard- AP had a rigorous training schedule to develop and maintain his racing form. Similarly, people who “lean in” at work (to use Sheryl Sandberg’s term) are often rewarded with promotions and pay increases. Increased income provides additional funds with which to invest. Ways to “lean in” include improving job performance and visibility, generating revenue or reducing expenses for an employer, and providing leadership to a work or community organization.

Don’t Give Up- AP could have retired after the Travers Stakes loss, but didn’t. Similarly, it is easy to give up after financial losses, career setbacks, or relapses in achieving goals. By pushing forward, however, success can be achieved. Many people saw their net worth (assets minus debts) slide in 2008, through no fault of their own, as the value of houses and retirement savings accounts plummeted. Investors who held firm and did not panic and convert “paper losses” into real ones were rewarded for their patience several years later as the value of their assets bounced back.

Pay it Forward- AP’s owner, Ahmed Zayat, makes donations to many charitable causes, including a program for retired race horses. Jockey Victor Espinoza also donated a portion of his winnings to charity. Philanthropy generates goodwill and income tax deductions. Most importantly, it helps others. Some investors donate appreciated securities instead of cash.

Adapt to Change- AP’s jockey, Victor Espinoza, changed strategy during the Preakness. The track was muddy, it was raining hard, and Espinoza pushed AP to the front of the pack to avoid having mud kicked on the horse’s face. Investors also need contingency plans for when circumstances change. Examples include having current beneficiary designations on life insurance policies and tax-deferred retirement plans and rebalancing your portfolio’s asset allocation periodically.

Want to invest successfully for financial security in later life? Take a page from American Pharoah’s playbook. Develop a series of escalating financial goals, work hard, be persistent, help others, and have contingency plans for when “Plan A” doesn’t work out. Best wishes to AP and his team. Thanks for some great horse racing memories and life lessons.

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