When you talk to your friends and neighbors about investment strategies, you probably hear a lot of the same ideas. People tend to invest some amount in blue chip companies, their employer, mutual funds, 401(k)s, IRAs, 529s, and money market accounts. As you look around, you might notice that everyone looks kind of similar. They may be wearing the same casual clothes you made fun of your parents for wearing a few years ago. And you may begin wondering if investment strategies are like Old Navy cargo shorts … something we all do without thinking about it.
It’s fun to imagine a backyard barbecue for money managers – well, it’s more fun than attending a backyard barbecue for money managers, anyway – and wonder if they have the same investment conversations we do. Do they all do things basically the same way? Is the distinction between these professionals as simple as how they slice the pie?
In contrast, whenever one of our friends makes a great investment, they hold court at the cookout. They tell us about the detective work they did or their amazing insider info, and we eagerly gobble it all up. The same thing happens with the pros. When one investor makes a counterintuitive trade that pays off, they become famous and charge a fortune in fees for their new fund. The easy lesson is that when everyone else is zigging, it’s time for you to zag. Unfortunately, when everyone else zigs, they probably have a good reason for it, and zagging is a bad idea.
The kinds of high-risk investments that sound cool at a barbecue can bring a great return, but they rarely pay off. It might not feel like it, but there are actually many more people at the barbecue who lost money zagging than there are people who made money. They’re just not going to gather everyone around to tell them about it. In fact, 8 of 10 fund managers failed to beat the market average last year, according to CNN.
Think about it this way: If you have 100 investors and 90 take the well-trodden path full of CDs and index funds, 10 others are taking odd risks and following their gut. If 90 percent of those people lose their money, that’s 9 out of the 10 idiosyncratic investors who lost money. If you do that again next year, that person needs to try something new again and has, once again, a 10 percent chance of success.
Then, imagine the same scenario the following year. The likelihood that this person can make big money three years in a row in this scenario is one in a thousand. If you expand it to five years in a row, the odds drop to one in a million. If it seems like there are too many investment experts living off a vast fortune for the odds to be so low, remember that the United States is a country in which being one in a million means there are 300 people exactly like you.
That diverse and boring portfolio is your best bet for bringing in the steady return you want. So, while it might be as boring as cargo shorts, remember that no one likes the neighborhood dad who always shows up to a casual barbecue wearing a fancy jacket and trousers either.