Avoiding Big Chute Risk

Ask anyone (Family Feud style) to name a board game about money — most will say Monopoly. However, I think the better answer is Chutes and Ladders.

A simple game of luck for ages 3+ where the player spins a spinner to advance through 100 spaces. If a player lands on a ladder, they advance several spaces. If they land at the top of a chute, they slide back.

If you research the origins, dating back to the second century BC, it was first used as a tool to teach children the Hindu concept of destiny or fate.

The Investment Analogy

The standard Milton Bradley Chutes and Ladders board has 100 numbered spaces, nine ladders with an average gain of 23.33 spaces, and 10 chutes with an average loss of 24.3 spaces.

Imagine reaching space 100 is equivalent to accomplishing 100% of your retirement savings goal. To estimate how long it takes, I played 30 games. On average, it took 37.53 spins.

Investing is much the same process. Most of the time, not much is happening. You contribute savings, and your portfolio moves in a positive direction. Then occasionally you earn big returns (a ladder).

Ladders vs. Chutes

In my study, I landed on a ladder space only 10.7% of spins, but those accounted for a large proportion of progress toward my goal. In real life, if you missed the best 25 days of market returns from 1970 to 2016, your returns would have gone from 1,910% to 371%.

We need the ladders, because they contribute disproportionately to total returns.

The Big Chute

It's "the big chute" on dreaded space 87 that you pray you don't land on. If you land on space 87, you immediately lose 63 spaces (a 72.41% loss). Landing on space 87 significantly increased the number of spins needed to complete the goal.

How to Avoid Big Chute Risk

In real life, you can avoid "big chute risk" by reducing investment risk (less stocks, more bonds) as you edge closer to your retirement goal.

Investing does not have to be hard. This is a game a three-year-old can play. As long as you diligently keep spinning and avoid big chute risks, you will reach your goals.

Happy Thanksgiving!

Amy Hubble, PhD, CFA, CFP®