This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See them all.To be a successful investor, you need to know the odds.
Investing is far more important than gambling. Yet most gamblers understand the odds before they place a bet. Few investors understand the odds of achieving a return on their investments.
The odds of shooting snake eyes at a craps table are one in thirty-six.
The odds of winning on one number at a roulette table are one in thirty-eight.
Most investors buy actively managed funds, where the fund manager attempts to beat a given benchmark. What are the odds she will be able to do so?
They are one in thirty-six. Sound familiar?
Almost every broker and many advisors will tell you they can pick stocks that will be winners. What are the odds they can deliver?
About 1 in 10,000, according to Merton Miller, a Nobel Laureate in Economics.
What are the odds that following the advice of market-timing newsletters will permit investors to "beat the markets?"
One study of 32 newsletters over a ten-year period indicated that none of them beat the returns of an S&P 500 index fund. Zero!
Rich people know a broadly diversified, low-cost portfolio of index funds for the stock and bond portions of their portfolio is the "best game in town." They don't use brokers or advisors who claim they can do better.
They know the odds.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).
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