Let’s assume you could predict the future. You knew when the market was going to take off or tank. You also had special insight into stock prices. You could tell if the price of a given stock was too low or too high.
A rare talent
You would have a unique gift.
You not only would have foreseen the Great Recession and moved to cash just in time to avoid the crash, you would have invested at the bottom of the market and reaped the ensuing gains generated by the long bull market that followed.
Your special insight would have been put to the test for the 30-year period from 1963-1993, consisting of 7,802 trading days. Using your skill, you would have been fully invested for the mere 90 days that generated 95 percent of all market gains during that period, and sat in cash on the sidelines for the other days.
Think about that for a moment. Being invested for only about 1.2 percent of all trading days accounted for almost all the profits the market accrued during that time.
With your personal investments, you basically have these options:
- If you have this talent, invest your own money. You’ll make a killing.
- Find someone who has this talent and use that person to manage your money.
- Give up the search for someone with magical powers, and buy a globally diversified portfolio of low management fee index funds, in an asset allocation suitable for you. Stay the course in good times and bad.
The problem with option #1 is obvious. You don’t have this talent.
The problem with option #2 is less obvious, but very compelling. No one has this ability, including “gurus” who claim they do. An analysis of well-known market forecasters (discussed here) found none of them had a track record sufficient to beat the returns of a simple index portfolio.
While #3 is clearly the right choice, there’s a huge industry spending hundreds of millions of dollars annually to persuade you not to adopt it. They’ll say almost anything to persuade you to hand over your hard-earned money to them.
The next time they approach you, ask this question: Can you tell me the 1.2 percent of trading days over the next decade likely to be responsible for almost all gains in the market?
However they respond, run for the door!
Resource of the Week
Check out this analysis of the track record of self-appointed “gurus.” It’s really sobering.
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