Do You Feel Lucky?

Whenever the topic of investing comes up with teachers (and other folks, but most of my experience is with teachers), two common obstacles often appear: fear and overconfidence. While these obstacles are on opposite ends of a spectrum they both can be very damaging. Let’s take a brief look.


Probably the more common of the two obstacles around investing (at least among teachers) is fear. Many people are freaked out about investing. They feel like they don’t know enough, and that you have to be some kind of “expert” who spends all their time paying attention to the market in order to be successful. They often react to anecdotes and headlines, and humans in generally are famously loss-averse, so the anecdotes and headlines where people lose a lot of money are the ones they tend to remember.

As a side note, many of these folks also think of the stock market as gambling, but that’s not a very accurate analogy. When you gamble, the results are up to chance and the odds are always in favor of the house. (Even with games that involve some skill, there’s still a lot of chance, and the odds are still always with the house.)

Investing in the stock market is not gambling, it’s buying partial ownership of companies. In the case of a total stock market index fund, you are buying an ownership stake in over 4,000 companies. If you want to think of it as gambling, I suppose you could, but what you are gambling on is that the human race is going to continue to progress. While we (as a species) have a ton of problems, and we sometimes take a step or two back, the arc of human history has always, eventually, bent toward progress.

And, it’s true, investing (particularly in stocks) can be volatile, and you can indeed lose money (particularly in the short term). But that very real fear then gets in the way of the evidence that over the long term, at least historically, investing (particularly in stocks) is very, very likely to earn you a good return. But spreadsheets and charts and percents often have a hard time competing with the amygdala.

As a result of this fear, many folks prefer to keep their money in “safe investments” like a savings account or certificate of deposit. The thought process is, “Well, at least I won’t lose my hard earned money.” What they don’t realize, unfortunately, is that putting their money in a savings account is almost certainly guaranteeing they will lose money. It is true that the balance in their savings account won’t go down and will (slowly) increase with the minimal interest rates most banks and credit unions are paying on savings accounts. But, unfortunately, the purchasing power of the money in their savings accounts will almost undoubtedly go down due to inflation. Historically, savings accounts have not kept up with inflation. When inflation is in the 2-3% range like we’ve been used to, that doesn’t feel all that bad (although still has a huge impact over time). But when inflation is in the 8% range (like now), it can be devastating to your financial health. They are locking themselves into losing money in their attempts to avoid losing money. Savings accounts serve a purpose, but they aren’t investments, and you don’t want to keep any more in them then you need.

Here’s a chart (sorry, I don’t have the original source), that illustrates this idea nicely.

The “solution” to fear of investing is education (and patience), and it’s a process. More on that later.


Less common (at least among teachers), but still a big issue, is the obstacle of overconfidence. This usually occurs in the form of individuals feeling like they – or their financial advisor – can pick stocks, time the market, and do other “wizardly” things in such a way that they can “beat the market.” (In many ways, this is what the fearful investors above think a successful investor looks like.) They believe in active management, often buying and selling individual stocks, chasing after performance with actively managed mutual funds, choosing a sector or a factor approach, and just generally trying to “time the market” in order to “beat” the average return.

Unfortunately, the evidence doesn’t back this approach up.

So why do people do it? Well, it’s complicated. I think it’s much like people feel like driving their own car is safer than flying in an airplane, because when they are driving the car they are in control, and when they are on an airplane the pilot is in control. It’s similar with investing. If they – or they in concert with their financial advisor – are in “control“, then surely the outcome will be better. Humans have a bias toward action, not inaction. “Don’t just sit there, do something!” Whereas in investing the best advice is often, as Jack Bogle said, “Don’t do something, stand there!”

People also do it because it is possible to beat the market, especially in the short term (and occasionally, very, very, very rarely, in the long term). It feels good when it happens and it gives many folks a false confidence that they can replicate it (again, see the links in the list above that show they most likely won’t replicate it).

And people also do it because they just don’t know what their actual results are. Because markets (at least historically) have gone up over time, even if you are overconfident and think you can beat the market, you will still likely earn a fair amount of money. And then people point to that and say, “See, I did great!” (Much like people think their house is a great investment, never doing the math to see how much lower the return is when compared to investing in the market.) People just look at their gains and say, “I’m really good at this,” but rarely compare it to a benchmark. It may look good in isolation, but it almost always (at least over longer periods of time) trails the market index. And it’s often even worse than what the comparison indicates, because they usually ignore many of the expenses and fees associated with their investments – especially tax drag in taxable accounts – when calculating the return they’ve “achieved.”

Even if an individual is that rare, rare person who does beat the market, either on their own or by picking a financial advisor or an active mutual fund manager, it’s still really hard to determine if they beat the market due to some innate skill, or just due to luck. As Kenneth French calculates, it takes 64 years to have enough evidence “before confidently inferring (with a t-statistic of 2.0 or greater) that [their] alpha is positive.”

The “solution” to overconfidence of one’s own ability in investing is education (and patience), and it’s a process. (Although I think this is often a less successful endeavor than it is with fear.)


Being a former math teacher, I naturally tend to rely on some of my teaching experiences to try to convey some of these ideas around investing, probability and statistics, and luck. Here’s one attempt.

Pretend I’ve asked you to flip a (fair) coin ten times. How confident are you that you will flip 10 heads in a row? Well, if you’re like most people, probably not very confident. I mean, you know it’s possible, but not very likely.

But where this gets interesting (and relevant to our investing discussion), is what happens when you think about what if I asked 1024 people to flip a coin ten times in a row (or, alternatively, for you to flip a coin 10 times in a row but then repeat it 1024 times). Well, in that case, you would expect one of those 1024 people to get 10 heads in a row. Here’s the million dollar (perhaps literally) question: Do you think that person is especially skilled at flipping coins?

I think (hope) most people would say, “No, they aren’t skilled at flipping coins, it’s just chance. It was random!” So now let’s think about asking a million people to flip a coin ten times in a row, what would we expect? We would expect about 976 of them to flip ten heads in a row. How about all 330 million people in the U.S.? We would expect over 322,000 of them to flip ten heads in a row. Population of Earth (7.75 billion)? We would expect over 7.5 million people to flip ten heads in a row. That’s a lot of people who are really good at flipping coins!

And yet, when one out of 1024 investors beats the market, they most likely think they are especially skilled at investing. And they truly might be, but we have no way to tell, because it could just be luck, totally random. In fact, we would expect over 322,000 Americans to “beat the coin-flipping market” from luck alone, and it would be indistinguishable from skill. (Well, as noted above, perhaps after 64 years of statistically significant outperformance we could tell something.) And if you expand out “winning” to flipping ten heads in a row or ten tails in a row, still not something most people would be confident of, that would double the numbers of people “beating the market” above.

So, when the teacher down the hall (or your cousin Ralph) boasts about their investment prowess, or that their financial advisor can beat the market, how do you really know it is due to skill and not luck? And that’s a critical question to know if you want to know if money you invest with them now is going to outperform in the future.

As a side note, I’m not trying to knock financial advisors. I think a good financial advisor can be very, very helpful. But their worth is not in their ability to pick investments, it’s as a “financial life coach”, helping you with all of your financial decisions. In terms of investments, that would certainly include helping you determine your asset allocation and, critically, helping you stick to your plan when the markets are down. But it doesn’t come from picking individual stocks or actively managed mutual funds.

There’s one thing that I’ve always wondering about folks who think their financial advisor can consistently beat the market. If they can, why are they working with you? Either they should be working with very high net worth individuals (because they will make much more from them than from you), or they should already be fabulously wealthy because they know the secret to beating the market. Spending time helping you beat the market is really not the best use of time or return on investment for them.


So, what to do? Well, certainly we can share some of the information above. To address overconfidence, we can talk about short term versus long term outperformance. We can talk about distinguishing skill from luck. We can share the statistics that show that few investors can outperform the indexes over ten years, fewer still over twenty, and only about 1% over thirty years, and even some of those lucky 1% just got lucky.

To address fear, we can also share the information above about long-term return from investing, as well as how our understanding of economics supports that investments (particularly in stocks) should grow over time. We can share that a simple three-fund portfolio (Total U.S. Stock Market Index, Total International Stock Market Index, Total U.S. Bond Market Index) is really all you need to be very successful. Heck, most investment custodians even have a box you can check to handle automatic rebalancing once a year if you don’t even want to pay attention to that. (Or you can choose a target date fund for built-in rebalancing and even more simplicity, although that may not be optimal.) We can let them know that investing is not (or at least doesn’t have to be) complicated, you don’t have to know a lot, you don’t have to be afraid. Even if you don’t “beat” the market, you will almost assuredly be wildly successful.

But it’s a process. And it takes time. And we may not convince everyone (and that’s okay, maybe they will be a really good coin flipper). But if everyone who reads this can convince at least two people who are currently in the fear camp to get started investing, or perhaps one person who is in the overconfidence camp to perhaps reconsider how they are investing, we can make a large, positive impact on their lives.

So let as many folks as possible (maybe even yourself) know that they don’t have to be lucky, they don’t have to be an investing wizard and pick individual stocks or actively managed mutual funds, they don’t need to “time the market.” Instead, they need “time in the market“, with a simple, low-cost, diversified index-fund-based portfolio. The difficult part is actually then doing the hard work to ponder and reflect about how to use those earnings to live the life they want to lead, one that aligns with their values and goals.

2 thoughts on “Do You Feel Lucky?

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