Given the choice, which would you prefer?
- $100, or
- A coin flip: Heads you win $200. Tails you win nothing.
Each scenario has the same expected return, yet most people (myself included) would take the $100 without a moment’s hesitation. That’s because most of us are risk averse–all else being equal, we prefer certainty to uncertainty.
So if every actively managed mutual fund has a 50% chance of beating the market, shouldn’t most of us prefer to invest in an index fund (i.e., accept the market’s return–the $100) rather than go for the coin flip?
I would.
Of course, the real kicker is that picking actively managed funds isn’t a coin flip. It’s a 6-sided die roll where you only win when you get a 6.
Want to learn more about investing?
Enter your email address to receive free updates from this blog. (You won't receive any emails other than blog posts, and you can unsubscribe at any time.)Like Cliffs Notes...for Investing
| If you're looking for a brief, plain-English introduction to investing, I'd encourage you to pick up a copy of my book: Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less. |  |
{ 1 comment… read it below or add one }
Hi,
in first case, isn’t there a “assured return”? while in second case isn’t it an “expected return”.
Is “assured return” = “expected return” ?
Best Wishes,