Smart Investor Makeover: Odds Are You are Gambling With Your Investments (Video)

Here's a mind twister for you: The odds of flipping a coin and getting a head is obviously 1 out of 2. The odds of getting four heads in a row is 1 out of 16.

If you flipped three times and got three heads, what are the odds of getting a fourth head?

The answer is still 1 out of 2.

Past performance of the coin toss does not affect future probability.

The SEC requires mutual funds to indicate that past performance is not indicative of future performance. This does not stop advisors and brokers from touting past performance of "hot" funds to their clients.

The failure to fully understand the odds is one of the primary reasons why the average return for most investors is so dismal.

In this week's Smart Investor Makeover video I discuss the importance of knowing the odds.

In less than three minutes, you could change the way you invest forever. I hope you enjoy it.

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.

Comments

[AmericanFool]

Garry K, one other comment. Most professional traders lag the market. However, Wall Street has access to markets that individuals will never participate in, for good or ill. Some traders have taken down their entire company (Amaranth), other companies get rich by facilitating trades as much as by trading themselves (Goldman Sachs), there's myriad ways to make and lose money in the markets. There are also legal and illegal but hard-to-prove ways to cheat, especially for the really wealthy among us. For the other 99% of us individuals, it comes down to Keep it Simple, know your boundaries, get your 8-9% returns, and don't worry about the fat cats or anybody else.

[research]

BS, we are not paying reparations for WWI like the Germans had to.

[geithnertookmymoney]

Having said that, unless we rethink the way we use our wealth, this world is doomed. al-Waleed bin Talal, however he came by his wealth is in a position to make a difference. Instead he chooses conspicuous self-consumption.
next shoe to drop real soon...hyp­erinflatio­n..market tanking..sell now

good articles for a slow news day: href=".http://www.iamned.com">Econ & Finance Articles Updated Daily

[Aaror]

Mr. Solin,
I always enjoy your posts, but I can't watch video most of the time on Huffpost.
Is there any way you could include a transcript with your video?
Thank you.

[Dan Solin - Huffpost Blogger]

I am sorry that you are having this problem. Currently, I don't have transcripts but I will look into having them in the future.

[Sean Tisdall]

Vanguard's S&P Funds beat the bond market with low Management Expense Ratios... one of the few times I wish I were an American for economic purposes. But yeah, I wouldn't be an active trader in either case, and might only buy a certain company because I want a sense of active ownership, and because I regularly buy their goods; In the same way a New Yorker might buy Con Ed or a dog lover might buy petsmart if they buy a lot of kibble there, etc. But I digress.

[twofish]

That assumes a fair coin. There is nothing fair about the stock market. Though it may well be random -- thinking of that book "A Random Walk Down Wall Street."

[desertman]

Rule #1: Never invest in what you do not understand.

[GarryK]

You know the chart they ALWAYS trot out that shows over the last 75 years (or whatever), stocks always outperform every other investment category? That assumes all stock market investors are equal. I'd like to see three curves: the annual returns the sheep like us get, the annual returns that the Wall Street guys get, and how much the Wall Street guys earn in commissions and merger and acquisition fees (which essentially move profits from all shareholders to investment bankers). After seeing these new curves, the only question remaining would be, 'now where should I put my retirement $ ?'

[jsgaetano]

Index funds.

[AmericanFool]

Exactly. Garry K, here is what you do:

Contact Vanguard Investments

Buy Index funds, low fees... around 0.20% to 0.35%

Invest in an appropriate Asset mix. E.g. 30% VTSMX US total Market Index, 30% VGTSX Int'l Stock Market, 25% VIPSX TIPS and 15% VBMFX Total US Bond Market. Or go to Marketwatch and pick a Lazy Portfolio. Over 20 years you should get an 8% avg anual return, with less variability in returns than the S&P500. You can add 5% REITS and 5% emerging markets and take the 30% ratios above down to 25% each to smooth your returns more. You will lose about. 0.25% to Vanguard annually in the form of fees, but do better than 90% of investors out there. Don't worry if you lose 15% any one year, just grin and rebalance annually.

Studies show individual investors lag the market by 5 to 7 percent annually, because 1) poor asset allocation 2) they sell their "losers" exactly when they should be buying 3) they pay huge plan fees 4) they buy 'managed' funds Avoid panic and stay invested. As of Dec 31 2007 I had weathered 14 years of up and downs, the dot.com bust, and still had an avg annual return of 9.9%. I lost 12.7% in 2008, now at 7.4% avg over 15 yrs. I'm up 5% 2009 YTD, and at some point there will be a recovery, my metrics will improve. It can be done.

[desertman]

consider gold and other tangible assets