Truth be told, I’m not much of a gambler, but the allure of the bright lights, ringing bells, and the possibility of winning it big tugs at my better judgment. I’m particular fond of the game roulette. I normally place single “inside bets,” meaning that I would try to select the exact number of the pocket that the ball will land in (out of 38 numbers…at least in the American version). By doing this, I effectively have a 1 in 38 chance of choosing the correct number and winning the game (not the best odds, I assure you).
A 1999 study by John Bogle showed similar odds of success. He compared the returns of 355 U.S. equity mutual funds over the past 30 years and found that only 9 funds managed to outperform the market by at least 1% (he considered these to be “true winners”). This would imply that as an investor in 1970, you would have had a 1 in 39 chance of selecting one of the winning mutual funds – slightly worse than your odds at selecting the exact number on a single bet in the game of roulette.
Just as selecting the exact number in roulette isn’t a prudent investment strategy, neither is attempting to select an outperforming fund manager in advance. The odds are not in your favour, so why bother playing? Instead, it may be more appropriate to invest your retirement savings in low-cost, passively managed ETFs and mutual funds, and leave the gambling for your next trip to the casino.