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Einstein's Theory... of Investing

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As legend has it, when Einstein died, he met two men and a woman outside the pearly gates. Always one to strike up a conversation, he asked them about their IQs.

The woman said her IQ was 190. Einstein was excited. He said: "We can discuss my theory of relativity".

The first man said his IQ was 150. "Good," said Einstein. "We can discuss global warming and arms reduction."

The second man sheepishly said: "I'm sorry, but my IQ is only 100. I'm afraid I won't have anything to discuss with you." Unfazed, Einstein looked at him intently and said: "That's not a problem at all. Where do you think the market is headed?"

Okay. I made that up. It is extracted from my book, The Smartest Portfolio You'll Ever Own.

Here's real wisdom from Einstein. He defined insanity as doing the same thing over and over again and expecting different results. Welcome to the world of investing where brokers and financial pundits start each year hoping you are as uninformed as you were last year. They depend on your lack of familiarity with the overwhelming data indicating they are emperors with no clothes, whose real expertise is separating you from your money by pretending to have the ability to predict the unpredictable and to bring order to random events.

Around this time last year, the respected journal Pension & Investments published an article titled: For 2011, it'll be all about equities. A survey of 2,007 responding institutional investors picked "winning" asset classes for 2011. Stocks garnered the most votes with 40%. Commodities were next and bonds came in last.

James W. Paulsen, chief investment strategist at Wells Capital, predicted the S&P 500 index would reach 1425 and achieve "possibly" a 15% total return.

The reality was quite different. The S&P 500 closed the year at 1,257 -- almost exactly where it was a year ago. The winning asset class was fixed income. A broad index of Treasury bonds was up 9.6%.

Let's give this some perspective: The biggest, best, brightest, most sophisticated and highly compensated institutional fund managers can't predict whether stocks will outperform bonds in a given year.

How do you like the chances of your broker picking stocks, timing the markets or picking outperforming mutual funds?

My New Years wish for all of you is this: Fundamentally change the way you invest. Cancel your retail brokerage accounts. Eliminate all individual stocks, bonds and actively managed mutual funds from your portfolio. Don't listen to anyone who tells you they can add "alpha" by "beating the market" or predicting whether it will rise or fall. Ignore the financial media with their breathless predictions about the impact of yesterday's news on tomorrow's prices. Don't succumb to the sense of urgency which causes fear and panic. Stop the transfer of wealth from your pockets into those who "advise" you.

Follow Einstein's advice and don't repeat your mistakes. Do that and I like your chances of having a happy and prosperous New Year.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published December 27, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.