Confused investors are easy to exploit.  The securities industry does a great job of blowing smoke, so you won’t understand how to invest intelligently and responsibly.

The phony “efficient markets” debate

“Of course the markets aren’t efficient.  There are lots of buying opportunities out there.”  How many times have you heard this argument (or some variation of it)?

It doesn’t matter.

Your quest for the next big “winner” is likely to cost you big time.

Fund managers with resources you can’t imagine work full time to find these “winners.”  Their track record is pathetic.  Over the long term, 99% of actively managed funds don’t beat the market.

It’s not impossible, but why fight those odds?  You’d likely be better off in a broadly diversified, low management fee, index fund.

The benefit of diversifying

Here’s what your stock-picking broker really doesn’t want you to know.

Assume your broker gives you a choice.  You can own a broadly diversified index fund, or he or she will recommend a portfolio consisting of 5 stocks, or 20 stocks or 40 stocks.  The broker will select the stocks.

The data supporting the broadly diversified index fund is compelling.  The fewer stocks you own, the greater your chance of incurring losses:

Number of stocks                                Possibility of loss

5                                                                      40%
20                                                                    25.5%
40                                                                    12.9%

The index fund will invest in thousands of stocks.  You do the math.

A shocking statistic

Your broker is picking one or a few stocks from thousands of possibilities.  Did you know that, in the history of the stock market, only 10 companies accounted for 16% of all the wealth created? A majority of stocks typically underperform their benchmark index over almost any period of time.

Heed this advice from John C. Bogle, in his seminal book, The Little Book of Common Sense Investing:   “Don't look for the needle in the haystack. Just buy the haystack!”

If you want the thrill of the chase, take some money you can afford to and lose and go to Las Vegas or try to pick an outperforming stock.

Don’t confuse this activity with responsible investing.  It’s gambling.

Resource of the Week

I recommend this excellent blog, and the accompanying video, posted on Marketwatch.

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