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.
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