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A Stacked Deck

One of the simplest investments you can make is buying a fund that tracks the performance of the U.S. stock market. By doing so, you ensure your investment return matches the return of the U.S. stock market, less a typically tiny fee. You won’t perform better. You won’t perform worse.

Left to their own devices, most investors don’t take this route – despite its ease and long-term track record of success.

Why? An often-self-defeating mix of marketing, greed, and vanity is to blame.

Investing is big business. Launching a mutual fund company to invest other people’s money can be extremely lucrative. As a result, mutual fund companies smartly spend large sums of money on sales and marketing efforts.

By telling the right story and convincing millions of investors to hand over their life savings, these mutual fund companies can rake in princely sums.

And there is one story that resonates with all investors, young and old alike. Strong past performance.

So, when a mutual fund company goes on a winning streak with its investment selections, the company then trumpets that performance to the mountaintops. Almost inevitably, investors pile into the fund. Those late investors, more often than not, find out all too well that there is tremendous truth in the saying, “Past performance is not indicative of future returns.”

Instead of continuing to fly high, these hot funds tend to cool – just as new investors are shoveling money at them based on historical performance and slick marketing.

But marketing is just half the equation. The other half is a product of greed and vanity.

We all want to believe we are talented investors. We want to believe we can compete with Wall Street. And in certain respects, individual investors do have an edge. Patience is a chief advantage over Wall Street.

But if “watching your stocks” amounts to checking the daily price movements, you are not likely to find your investing experience particularly rewarding – at least financially. It just can’t be that easy.

To be successful at investing in individual companies, you should be reading quarterly and annual reports. You should be listening to conference calls with analysts. You should be talking to the business’s customers and suppliers. And you should be using the product or service yourself.

Are all those things required? Certainly not. Is it possible to earn attractive returns on an investment if you don’t do those things? Absolutely.

And that’s the problem.

Some individual investors don’t do any of those things and do well in the stock market. They may even do well for years at a time. But eventually, most likely, their portfolios will go through a rough patch, and those gains that came so easy will be erased just as quickly.

If you started investing in the last 10 years, your experience has probably been enjoyable. The market has generally done well in that period.

But the market has a nasty way of reminding us that investing is hard. It’s possible that you can beat the market over time, but it’s not probable.

When you invest in anything other than a fund that tracks the U.S. stock market, you have your work cut out for you. You are working with a stacked deck.

Unfortunately, the deck is stacked against you.

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