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A true piece of investing wisdom

By Sam Instone - July 17, 2018

Recently I received a pearl of wisdom in my inbox.

It was from Dan Solin, author of the Smartest series of investing books. 

It was an observation.

One which has major ramifications for investors.

"Nobody knows how to outfox the market, because that requires outfoxing virtually all other investors."

Vanguard founder, John C. Bogle said that.

If you want to meet your retirement goals, you have 3 options:

1. Know what you don’t know 

Barry Ritholtz, CIO of Ritholtz Wealth Management LLC, explains the significance of acknowledging what we don’t know

He quotes a respected, sophisticated investor who states,

"I don’t know how the market will perform next year. I don’t know if stocks will be higher or lower in five years. Indeed, even though the probabilities favour a positive outcome, I don’t know if stocks will be higher in 10 years." 

This isn’t a matter of learning.

They are, in fact, unknowable. 

While there is a lot of noise and opinion in investing, no one can predict the unpredictable.

The trick is to accept this.

2. Redirect your efforts 

Sometimes, patterns simply don’t exist yet investors waste enormous amounts of time trying to find them.

They pick stock “winners’ by identifying the next “hot” active managed fund manager. 

The massive, multi-trillion dollar inflows into index funds and passively managed funds, and outflows from actively managed funds reflect this. 

Investors are starting to understand what they don’t know. 

3. Learn how to achieve superior returns

Here’s the secret Wall Street really doesn’t want you to know.

When you stop engaging in useless predictions and other discredited activities such as market timing, and simply capture the immensely powerful market returns (which are yours for the taking), you achieve superior returns. 

Financial journalist Larry Swedroe noted that, when you invest in index funds, you’re also virtually certain to outperform the vast majority of active investors trying to beat the market.

By giving up the slim possibility of finding the magic ‘perfect’ investment and accepting the efficiency within equity markets, you increase the odds of meeting your retirement goals.

That’s investing wisdom.

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