I recently made the drive to the casino in Charles Town West Virginia. If you have never been, a casino is an exciting mix of flashing lights and ringing bells. If you look around someone always seems to be winning.
At most casinos you will find a roulette table. In this game of chance a small ball bounces around on a wheel between black and red numbers. If the ball stops on your color you win. I stood there and watched people play, and as I watched, the ball landed on RED three times in a row.
It was now time to get into the game so I placed my life’s savings on RED and held my breath…
Ok, I didn’t really bet all my savings because I know the odds of winning at roulette are roughly 48%. If you look carefully, you’ll notice that the roulette wheel has a GREEN zero on the wheel that throws the odds in the casino’s favor. You don’t even have a 50/50 shot of making money!
Now think about your investments:
Replace the casino’s flashing lights and ringing bells with the hype from TV shows like “Mad Money” on CNBC.
Understand that just because an investment did well in the past (like landing on RED three times in a row) does not mean it will continue to do well in the future. The odds never change.
Remember that the roulette wheel has a GREEN zero that kills your chances of winning. Likewise, many investments have high, built-in cost that act like a green zero and almost guarantee underperformance.
In roulette you have a 48% chance of winning. When investing, your chances of picking a winning mutual fund fall to only 5% over 15 years. Just a 5% chance of doing better than average!
So keep on driving by the Wall Street casino. Buy low-cost, index mutual funds that mirror the market, instead of trying to beat it.
It’s time to put the odds back in your favor.