Given the time of year (and the recent market volatility) I thought I’d make a quick post reminding folks that the key to investment success is investing in low-cost, diversified index funds selected based on your investment time horizon. As I’ve written previously, no one can consistently beat the market and there really is no need to try.
So here’s perhaps a timely analogy. Many folks are avidly watching the NCAA basketball tournaments (men’s and women’s), and some of them even enhance the experience by filling out their tournament bracket and then seeing how they do.
Choosing to invest by picking individual stocks is like picking the winner of the tournament in advance, and then doing that consistently over and over again, year after year. Investing in index funds is investing in the entire field, all 64 (or 72 counting the first four). In the round of 64 there will be 32 winners and 32 losers and you will “own” all of them, but in the stock market the winners will win (earn) a bit more than the losers will lose, so you’ll come out a bit ahead (a gain on your investment). Then in the round of 32 you’ll own all 16 winners and 16 losers, and you’ll come out a bit ahead again (adding to your gain). In the Sweet Sixteen you’ll bet on 8 losers and 8 winners. In the Great Eight you’ll bet on 4 losers and 4 winners. Final Four: 2 and 2. Championship Game: You’ll bet on both teams. By the time you go through all six of those, coming out a little bit ahead each time, you’ll get a pretty decent return on investment – the market return.
The key to investment success? Don’t try to pick the red one, bet on all the teams in the green while keeping your costs low. Anything else is madness.
Fisch Financial 