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Get Rich by Beating the Odds

You're a smart person. You heed your instinct for self-preservation. You wouldn't regularly do something that could lead to serious injury or death. You certainly wouldn't get into an automobile.

What!? You do get into an automobile? What are you thinking? Don't you watch the news? Haven't you seen the mangled cars after a collision? Don't you know that you have a 1 in 7,000 chance of being in an accident, with a 1 in 18,585 chance of dying in that accident?

OK, so I get into cars, too -- fully aware of their potential dangers. In fact, since there are 50 miles between my home and Motley Fool Global Headquarters, I spend a lot of time in my car, even after seeing the accordion-ized byproducts of frequent accidents up and down Interstate 95. But I play the odds -- as does everyone else on the road. The benefit (not having to walk the 50 miles to work) is worth the potential risk.

There is no concept more fundamental to personal finance than risk vs. reward. We invest in the stock market, even though it goes down approximately one out of every three years and regularly wipes out years' worth of savings. We take on mortgages that are many times the size of our annual incomes despite the risks of pay cuts or job loss. We pay tens of thousands of dollars for a college education (for our kids or for ourselves) even though it's no guarantee of career satisfaction or even a job. But we take the risks anyhow, because, historically, the odds are in our favor.

But even as you take such risks, you can do things to (1) soften the blow if the odds go against you, and (2) increase your odds of success. Under the former category, we have:

  • Build a nice pile of cash (enough to cover three to six months' worth of expenses) in case your income stops coming.

  • If people other than yourself depend on that income, make sure you have life insurance in case you become permanently unemployable.

  • If people including yourself depend on your income, consider a disability policy in case you become unemployable but still need to spend money. (You'll likely find that a disability insurance policy is much more expensive than a life insurance policy. Why? Again, it comes back to the odds. You're far more likely to become disabled than to die -- even though it's possible you'll never become disabled and it's 99.9% guaranteed you'll eventually join that Great Oddsmaker in the Sky.)

  • Avoid high-interest credit-card debt so you're not just a middleman to your income -- passing your paycheck on to become your lender's income.

As to that latter category -- increasing your odds of success -- we submit the following:

  • Become addicted to saving. Crave it. Long for payday so you'll have some extra money to sock away. Get to the point where your spouse has to hide the checkbook so you don't compulsively overcontribute to your IRA.

  • Stick with stocks. As Wharton business school professor Jeremy Siegel points out in his definitive history of the stock market, Stocks for the Long Run, from 1802 to 2001 stocks have outperformed bonds in 61% of all one-year holding periods, 70.9% of five-year periods, 82.4% of 10-year holding periods, 95.4% of 20-year periods, and 100% of 30-year periods. Make no mistake: Unless you're a 90-year-old chainsaw juggler who smokes, you have a multi-decade investment horizon in front of you. Today's 60-somethings should expect to be tomorrow's centegenerians. (For more on stocks for the long term, read this article.)

  • Be a smart investor. Take only the risks in which you have demonstrated an ability to come out on top. If you have a mixed record as a stock picker, don't bet your retirement on five stocks. Asset allocation sounds like a boring term out of financial textbooks, but it has spared a lot of portfolios over the past five years. It's so important that I have devoted a whole area to the topic in my Rule Your Retirement newsletter service.

  • Play FOOLottery! OK, so it was a joke. In reality, the odds are monstrously stacked against you coming out ahead when you play any lottery (especially those launched on April Fool's Day). Actually, a version of this article was published on April 1 as part of the gag to make a point: You have to take risks. But the lesson of the joke is, make bets when the chips are stacked in your favor. If you want truly golden years, here are seven ways that are much more likely to pay off than any lottery.

So, Fool, take risks. They're essential to your financial, intellectual, and emotional well-being. As John Kennedy said, "There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction." But just make sure you're taking the right risks.

I could write more on this topic, but I have to get going. I have a long drive home.

Robert Brokamp is the editor of the Rule Your Retirement newsletter service, which is an odds-on favorite to be worth the price since you can take a 30-day free trial. Just click here.

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