Thursday, November 3, 2011

The Best-Kept Secret about Successful Investing

A widely-held belief is that the world contains a small number of financial geniuses who know what is going to happen in the stock markets and who make obscene amounts of money with their trading. With this world-view, the goal for the rest of us is to become a financial genius or hand over the reins of our investments to someone who is a financial genius.

When I first started getting serious about investing, I began by trying to pick the right financial genius running some mutual fund to invest my money. When this didn't work out, I set out to read every book I could find about investing and become a financial genius myself. In the end I discovered I was heading in the wrong direction.

The secret to successful investing is not making brilliant moves, but failing to make serious mistakes. Rather than trying to outdo other investors, the best strategy for most of us is to avoid doing anything stupid.

Almost all of us are best off just trying to match the stock and bond market indexes rather than trying to beat them. Investors who try to be smarter than the next guy try many strategies to beat the indexes, but most of the time they end up making dumb mistakes and paying lots of fees and taxes along the way.

Admittedly, this message is not exactly a secret; it is in many books and in many blogs. But the fact remains that the average person believes in the idea of financial geniuses whose advice they need for insights into the future of stock markets.

When people find out that I write a financial blog, a typical reaction is to ask me about what will happen in the market or with interest rates. I usually respond saying that nobody knows these things with any useful degree of certainty and that they shouldn't bother seeking someone who does know. This message usually falls flat. The world seems to believe in financial prophets despite the mountain of evidence to the contrary.


  1. Why not have a little fun... say you have access to a great investment that beats everything else but you'll be dead the next day if you tell them :)

  2. @Value Indexer: That's a good one. Your started my day with a smile.