Many of us hear our friends bragging about winning at the casino. But we never hear about the visits to the casino that result in losses. After you hear them brag about their winnings do you ask them to gamble for you, thinking they will repeat? Of course not, because you know it was only a matter of luck and in the long run the only ones to win are the casinos.  Investing for your financial future must/should not use the strategy of looking for the hot fund managers expecting them to repeat.

Most mutual fund companies know many, if not most of their managers will produce below market returns and only a handful will beat the market through random luck.  So what do they do with the funds that fail?  They make them disappear by closing them or merging them with more successful funds.  The lucky funds that survive are paraded out in marketing campaigns to lure more investors into the trap.  Academics call this Survivor Bias.

The media makes us believe that there are some fund managers who can beat the market consistently. Unfortunately this is not the case for most.

There is also the case of advisers building portfolios concentrated in the ‘hot’ asset class.

Right now the U.S. Large cap equity market is outperforming the international and small market by a significant amount. Will this continue? Eventually this will not be the case. However I have no idea when this change will occur. No one does.

When these ‘hot’ asset classes eventually turn down Investors are bewildered. Because they believed they had found the great adviser that would always earn superior returns..

What ensues is what I call musical brokers. Investors drop the poor performer and seek out the ‘hot’ adviser. This is not investing but rather gambling and speculating.

Remember a globally diversified portfolio will at times under perform a concentrated portfolio. But over time the globally diversified portfolio will prevail and earn great returns.

Unless of course you or someone you know is able to predict the future.

Given that this is impossible to consistently do.

If you are investing for retirement, both leading to and in retirement. You need to know your expected risk (volatility) and expected return. With this information you can plan an income stream that meets your current needs. As well as grow to accommodate for the effects of inflation.

Far too many investors are looking to maximize return to spend more. This will lead to very disappointing results.

Stop worrying whether you are invested in the right things.

Rather your strategy should be backed by academic research.

By including components in your strategy which have earned the Nobel Prize in economics in your long term goals will be met.

To succeed long term in investing you must own equities….globally diversify….rebalance.