Don't Bet Your Future

Do you gamble your life savings in Vegas? Well, maybe you should because your odds of winning are likely higher than trying to pick winning funds (which you're probably unknowingly doing now with actively managed funds). How do 4% odds of winning sound? Very bad.

Imagine you have two wonderful children. You have a choice on how you can send them to school each day. You can send them in the traditional big yellow school bus. It’s safe, always on time, but a bit boring. It gets the job done. Or you can let them ride in a Formula 1 race car. It’s fast, exciting, but very dangerous. It crashes 96% of the time. But hey, the other 4% of the time it will get you to school 5 minutes early (not that there’s anything to do once you get there).

Well, investing with a simple index fund strategy is the school bus. Investing with actively managed funds, trying to time the market, is the Formula 1 race car. Thrills are great in moderation in a controlled amusement setting. They stink when you’re life happiness and well being are at stake.

Historically, the S&P 500 has returned around 10% per year. $1,000 invested today would turn into $17,500 in 30 years. If you start investing early enough, you’re nearly guaranteed to have enough for retirement. Even if you started investing at the worst time, over long investing periods the average return that you’ll reap levels out to a good one. No need to take on inordinate risk.

But we’re human and it’s hard to keep a long term perspective when the fund companies and media are shouting about today. The market’s up, the market’s down. 10 “sure” picks for this year.

It’s all garbage. It’s the slot machines, the roulette table, the poker dealer, calling your name. You see stocks that shoot up. It seems like if you only got in early, you could have made a killing. But it’s like the lottery. Looking at the winning numbers, it doesn’t seem like it would be that hard to get them. If you only knew and bought that ticket. But it is hard. Really hard. And the historical record proves it when you see how very few active fund managers are able to consistently pick the winners enough to offset their costs. Hardly any.

Unfortunately people do bet their future. They chase the hot funds. They jump in after they hear the hype and jump out when it’s too late. There is no better indicator of which funds will be cold than by looking at which funds are the hottest today. A fund’s average return is greatly different than the investor of that fund’s average return. People almost always mis-time the market. It’s a fact.

You don’t need to gamble if you stick with the simple plan of basic asset allocation between an index stock fund and an index bond fund. But that’s boring and nobody makes much money if you do that – that’s why you hardly hear about it.