Hedging Your Bets

Well, Broncos fans, at least we don't have to worry about our team playing on Sunday anymore. Think of that season-ending playoff loss as a stress reliever!

The Broncos went into Sunday's game being a 7-point favorite. It turns out that Vegas was wrong by almost 20 points the other direction, and the Broncos lost by 11. As it turns out, John Elway is not too happy about it, either.

Investing, for the mutual fund manager, is a game of handicapping, just like Vegas; it's about the odds of winning or losing.

Investing, for the rest of us (real people), is a matter of life or death. The good news is, the odds are tilted in our favor. Over long periods of time, we expect the stock market will likely deliver between 10% and 12% per year. This is our expected return because it is the only reliable predictor we have: the long-term average. We never know exactly what the next year will bring. Instead, let's look to those short-term variations as a source of comfort; they are the reason we earn more over long periods of time.

Last year's performance has no bearing on this year's performance. Additionally, all these market highs have no bearing on whether this year will, yet again, hit new market highs. And, what's more, what did well last year (the S&P 500) may not do well this year. In fact, what did poorly last year (small companies from all around the world) may actually do better. So what's an investor to do?

Assess the risks. Assess the financial plans. Look at the picture from where we are, where we want to be, and invest with the best PROBABILITY of success and not let the possibility of failure distract us from what means the most to us. Ultimately, it's not the accumulation of money that matters, but the experiences, gifts, and opportunities that money provides.

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