The reason we even invest is because we want to put our money to work so that 20, 30, 40 years from now, we're going to stop working and retire, and we're going to need something to pay our bills. Most of us aren't going to be able to live on just Social Security, and so we put our money to work so that it'll compound faster than the rate of inflation. And really it's your job as an investor to not interfere with your portfolio's ability to compound over that time.

The loser's game is a concept created by Charlie Ellis in a paper he wrote 30, 40 years ago. Eventually it became a book called "Winning the Loser's Game." And Ellis, legendary guy, chairman of the Yale endowment, on the board of directors of The Vanguard Group, Ellis noticed that investing and tennis were both very similar in that they're two games in one. There's a winner's game and a loser's game.

What does that mean? Well, let's use tennis as Ellis's example. There are two games in tennis: the game the professionals play, the top 0.01% of players, and then there's the game the rest of us play, us 99.9% of the world who are amateurs. How do the professionals play? They play the winning game. They win by scoring points. They serve aces. They hit with power and accuracy. They kiss the line. They do fancy drop shots, lots of top spin. They keep the ball away from their opponent.

That's not how the loser's game is played. That's not how the amateur plays. How do us amateurs play? We lose through unforced errors. What sort of unforced errors? We double fault because we're trying to serve too hard. We hit the ball long, we hit it wide, we hit it into the net, we hit it right to our opponent. Instead of trying to play outside ourselves beyond our own ability, us amateur tennis players just return the ball, just keep it in play. Don't try and kill it. Don't try and hit the line. You are not skillful enough to do that. If you make fewer unforced errors and you let your opponent make those mistakes, you will win the loser's game by making less errors.

And so Ellis compared tennis to investing and he found something really fascinating. A handful of professionals, a tiny number of people, they can pick stocks and know when to sell them. They can identify which sector or country to invest in. They can time the markets. That's the 0.01% of people, and they're household names. You know who Warren Buffett or Peter Lynch is because they're such outliers. The rest of us, we're playing the loser's game. We're unfortunately underperforming because we're making all of these errors. We get emotional. We overtrade. We don't pay attention to costs. We ignore taxes. We make all of these mistakes that if only we avoided them, we would do so much better. That's why Ellis thought investing and tennis were so similar. Most of us are playing the loser's game and playing it badly. If we make fewer unforced errors, we would just be so much better off.

So a number of academic studies have found that a surprisingly few percentage of stocks are actually driving market returns. Professor Hendrik Bessembinder at Arizona State University did a study, and he found that just 2% of stocks are responsible for all the returns that we've seen over the past 75 years. Depending on the country you look at, maybe it's a little more, a little less, but it averages around 2%. How is that possible? Well, some stocks are up a little each year. Some stocks are down a little each year. Some stocks are flat. They all kind of cancel out. A handful of stocks are down a lot. Some stocks get crushed and go to zero. That leaves very few stocks that are the giant winners that drive returns.

In the context of the loser's game where we want to make fewer mistakes, every decision we make is another opportunity for error. And given how much the odds are stacked against us, if only 2% of stocks are driving most of the returns, what are the odds that we're going to pick that 1 in 50 stocks that's going to be a big winner? First, you have to identify a company that over the next 1, 3, 5, 10 years is going to grow its revenue and its profits. That's hard to do. Secondly, you have to buy that stock at the right time and at the right price. Overpaying for a stock isn't going to help you at all. Third, you have to be willing to hold that through all the ups and downs that company is going to go through. Economic cycles, missed revenue expectations, missed profits. Stocks don't go up in a straight line, they're up and down. And sometimes when stocks pull back, it's just a temporary setback and eventually they recover. Knowing when something is just pulling back temporarily or that its best days are behind it and it's on the way down permanently, that's a really difficult thing to do. Emotionally, we have all these sunk costs in that stock. We've researched it, we've investigated it. If it's helped make us money, we're loathed to cut it loose because hey, we're tied up. It's the endowment effect. I own it, therefore it has to be pretty good.

It's very, very difficult to tell the difference between a Microsoft and an Intel. Both added to the Dow Jones Industrial 25 years ago, Microsoft has done exceedingly well. Intel not so much. How can you identify that in advance? Being added to the Dow is like, hey, you've made it. This is the top group of stocks as decided by the editors of Dow Jones. And now when we look at the performance of these two stocks, they've gone in completely different degrees. The odds are stacked against you being a successful stock picker.

And to put some numbers to that, let's take a look at professional mutual fund managers. In any given year, less than half of them beat their benchmark, meaning they're going to do better than the market. So that's telling us fewer than 50% are actually picking stocks better than just a boring, cheap index is performing. You take that one year and expand that out to five years, it turns out 80% of them fail to beat their benchmark. You take that to 10 years and it's over 90%. Net of fees and taxes, less than 1 in 10 mutual fund managers beat their benchmark. And over 20 years, it's virtually nobody.

And so understanding how much the odds are stacked against you as a stock picker is why indexing has become so popular these days. People have figured out, I'm not going to try and pick the next Nvidia, I'm going to buy all the stocks and that way I'm guaranteed to own that. And it prevents you from allowing your behavioral errors to interfere with your portfolio. You are not selling a stock prematurely. You're not timing the market. If you do regular dollar cost average, if you buy a chunk of stock, you buy a specific index every month, every paycheck, you're guaranteed over the long haul to do better than 99% of your fellow investors.

So when you're thinking about putting money in the market, you need to have a plan. And I try and lay out a number of specific steps you can take really to prevent yourself from interfering with your money's ability to compound in the market. So first step is to automate the process. Take the emotions out of it. With your 401k or 403b or whatever your tax-deferred saving plan is, you are making contributions every paycheck. If the market goes up, great, it means what you bought before is higher. If the market goes down, great, you're buying more at a better price. Over the fullness of time, that sort of dollar cost averaging, every paycheck, every month, means that you are buying regardless. And the math tells us that's the most effective way to invest for the future. Nobel laureate Paul Samuelson once said, "Investing should be boring. It should be like watching paint dry or grass grow. If you want to have some fun, take $800 and go to Vegas and gamble." Don't gamble with your portfolio.

Let's talk about diversification. Investing is really a very humbling exercise. We all have to admit to ourselves, we don't know what stock, what commodity, what sector, what country, what asset class is going to do best this year. You know, you get this quilts, this patchwork showing year by year what have been the best performing sectors in the market, and it's completely different year by year. One year REITs are at the top of the league table. The next year it's tech stocks. The next year it's small cap value. It's all but impossible to predict. And so rather than throw darts, rather than guess, we own a broad diversified portfolio. We own a little bit of everything. And that means you're always participating in the sector that's going up. You probably wish you had more of it this year, and then next year when it's not doing well, you're happy that you didn't overload that particular sector. Diversification means you're broadly participating in every asset class rather than speculating, rather than guessing. It's the best way to make sure you own the best-performing assets. You know, Jack Bogle, founder of Vanguard Group, famously said, "Instead of hunting for a needle in a haystack, just buy the whole haystack."

You have to be aware of costs. That's just simple math. The more you're paying for a mutual fund or an ETF, the more that drags on your performance. In fact, we've seen a number of studies over the years that over the course of 25, 30 years, a high-cost portfolio, everything else being equal, will generate 20% less value at the end of those 25, 30 years than a low-cost portfolio. A study on the Bogle effect, Jack Bogle was the founder of Vanguard that specializes in very low-cost funds, you could look at BlackRock and State Street are similarly low-cost funds are known for that. The Vanguard effect has identified that by 2016, Vanguard fee pressure had essentially saved investors $1 trillion over the previous 30 years since Vanguard launched in the mid-1970s. Since 2016, over the next decade, it's about another trillion dollars in fees that have been saved by the Vanguard effect. It's that much more money in portfolios. It's that much more money that's compound and that investors own. And so fees matter a great deal.

Go back to the bad old days of the 1960s and '70s. Mutual funds used to cost 1, 1.5, 2% of your assets. Some funds came with a front end load of 5%. In other words, you give the fund company a hundred bucks and they invest 95 of it for you. Think about what a drag that is on returns. And really the technology didn't exist for us to understand this easily. People just saw the markets were going up from World War II to, let's call it 1966, was a really substantial gain in assets. Nobody really focused on what's driving these gains and what are the headwinds we're up against. And then something similar took place in the 1980s and '90s. We had a big bull market. Around the '70s and '80s was when we first started paying attention to the data as to the drag fees put on performance. So it's not just mutual funds, it's transaction costs. You know, it used to cost $300, $400, $500 to buy a stock. It's free today. We deregulated the markets in the early '70s, and that allowed brokers to compete on fees. And we went from a few hundred bucks to a hundred bucks. I remember the commercials for the various online trading shops, $8 transactions. Eventually that became free trading. And so the cost structure of that is gone. And then when we look at what's taken place with mutual funds and ETFs, it used to be 1, 1.5, 2% to buy those. They're well under half a percent today. You could buy a broad index like the S&P 500 or the Vanguard Total Market. It's five bips. The cost is practically nothing, and that just compounds in your favor. The lower your costs, the more you keep at the end of your investing life.

You know, back in the bad old days, you would get a quarterly update of your portfolio, you'd get a statement and it was a big deal. Everybody sat around waiting for their statements to arrive and you would see how well you did. And that was probably too extreme in one direction. Technology has given us the ability to watch our portfolios second by second, tick by tick. That's too far in the other direction. You should check your portfolio occasionally just to see how it's doing. Monthly is probably plenty. If you are concerned about something in particular and you start noticing yourself checking your portfolio more frequently, sometimes that's a little bit of an alert that, hey, maybe you have too much risk on and you're too concerned about your exposure, or maybe you are entering a period of market volatility and that's going to create an opportunity for you to buy stocks at a cheaper price.

People talk about the importance of rebalancing. Let me give you a little context of what rebalancing means and how you should think about it. The idea is that stocks go up over the long run. And so if you have a portfolio that let's say is 70% equities and 30% bonds, in the event of a market selloff, hey, maybe you end up 60% equities and 40% bonds because of how those two asset classes have moved. What we suggest to people is that they rebalance into equities. You sell a little bit of the bonds that ran up, you buy a little bit of the equities that ran down. And essentially what you're doing is selling bonds high and buying stocks low. It's sort of counterintuitive. The time to rebalance into equities are when we have these deep market corrections or drawdowns, down 20, 30, 40%, that's where you want to engage that. Most of the time, you shouldn't really be worrying too much about rebalancing. I don't think it's that important for the average investor's portfolio.

So, "Nobody knows anything" comes from William Goldman, who was a screenwriter in the '60s '70s, '80s. And he wrote a pretty scathing confessional about Hollywood and how bad executives in the various studios were at predicting which films would do well. Almost all the studios passed on "Star Wars," on "Raiders of the Lost Ark," on "E.T." And it's only when one random person says, "All right, let's give this a shot," that some of these movies go on to become blockbusters, despite most of Hollywood not thinking there was anything there.

Taking that same concept to the world of forecasts. Forecasts are when a market professional or expert or talking head or pundit says, "I believe this asset class will be this price at this time." Specific asset, specific time and date, specific price. And when we look back through the history of expert forecasts, it turns out that the experts are no better than any of us. Wharton Professor Philip Tetlock did a study on this. He looked at thousands and thousands of forecasts. He found they were no better than the average person's prediction, and the average person's prediction is pretty bad. Just take a look at the past few years. Heading into 2020, nobody had a pandemic closing the economy. Oh, and by the way, from March till the end of the year, the market's going to rip up 69%. That wasn't in anybody's forecast. Nobody had the Russian invasion of Ukraine in 2021. 2022, nobody had the Federal Reserve raising interest rates 500 basis points, sending stocks and bonds down double digits. That's a very rare occurrence for stocks and bonds to both be down that much in the same year, hadn't happened for 40 years. And so it turns out, the future is just so filled with random events and unanticipated things occurring that making forecasts out a year, it's really a fool's errand. And if we make our investments based on these forecasts, we're really destined to do poorly.

We have to be aware of our market timing, and becoming fearful and emotional every time the market has a pullback. We look at the history of markets, they're down 5% twice a year, they're down 10% two out of every three years, and they're down 20% fairly regularly. If you respond to every time the market twitches, you're going to prevent your portfolio from compounding over time. We think we can time markets. Here's the fascinating thing about news and market timing. Markets are pretty efficient. You know, they're not 100% perfectly efficient, but if you're seeing something on a website, on TV, in a newspaper, the odds are that every other person with capital at risk in the markets has not only seen it, but acted on that. And that news is already reflected in stock prices. So you see the cover of a magazine or the headline in The Wall Street Journal, that information is already in the price. To imagine that you're going to read that and then act on it in a way that's going to be beneficial to you, you're essentially trading on old information. I know we call it news, it's news to you, but it's old to the market.

What studies have shown us about people who sell when markets make a low, in other words, they panic sell into a crash. About 30% of these people never return to equities ever again. That's an amazing statistic. Think about what happened when people panic sold January, February, March 2009. The market has had an incredible run over the next 15 years, and nearly a third of people who sold into those lows never got back into equities. That's devastating to a portfolio's performance. Avoiding these unforced errors, having a plan and sticking to it, that's the secret of winning the loser's game.