Active Investing Is Worse Than Gambling

You wouldn't know it by the number of people who gamble, but most gamblers know that the odds are stacked against them. The house is always favored. But even though most people are going to lose, they still gamble because it's exciting, and hope springs eternal.

This same concept applies to active investing (ongoing market timing and stock picking), except that people don't realize the odds are stacked against them. Little do investors know that the 'house' - their commission-based reps and the financial services firms and funds for which they work - is always favored due to the structure of the expenses they charge.

In a way, active investing is worse than gambling - at least the risks to gamblers are obvious. But active investors assume (wrongly) that past performance should be an indicator of future performance. Imagine a coin flipper landing on heads 75 out of 100 times. Gamblers know that is 'luck', but for active managers that means a solid 'performance'. In truth, that does not mean the next 100 flips will have the same outcome, and stock pocking performance has been shown to be similiar.

So why do people keep utilizing active investing with commissioned brokers? Same as why people keep gambling - it's exciting (more than buy-and-hold) and hope springs eternal. But there's another reason - they don't know there is another way to invest besides the traditional financial services model. [See prior posts.]

There is another way. Take the fee-based passive approach. It levels the playing field. It makes investing more than just a roll of the dice. It's a proven winner.

Don't be a sure loser - don't gamble with your money by partaking in the traditional active model.