The 14 Truths You Must Know When You Invest

Fidelity's founder Johnson says, "I can't believe investors want to accept average returns." Here's the key point: Market returns aren't average returns. If you accept market returns, you are guaranteed to beat the average investor collectively. It must be so. All you have to do is stop trying to beat the market.

If the markets are efficient, then no management is better than good management. The competition is the market, and the market sets a tough bar to beat. If you aim for market returns, you have much better odds. You won't beat everybody, but you'll beat an ever-increasing group.

Truth 8: Buying Individual Stocks Is Speculating, Not Investing

Individual stocks are much riskier than an individual portfolio. Let's say you buy a big block of IBMIBM because you think it's going to outperform. Are you sure it's going to beat the market? Can everyone be right that their stocks will outperform the market? No.

From 1957, when the S&P 500 was created, to 1998, only 74 of the original 500 components remained. Some were merged out of existence, but others went bankrupt. Now, of the 74 that remained, guess how many of them managed to beat the index? Twelve. If that doesn't convince you of the difficulty in beating the market with individual stocks, I'm not sure what else to tell you.

Let's look at the 1990s, that great decade for investors. Twenty-two percent of all stocks that survived the decade lost money -- and 5% of all stocks disappear every year! Here's the problem. People think of stock returns as normally distributing. They're not. One Microsoft that earns 10,000% offsets a lot of losers. The only way to ensure you get Microsoft is to buy all of them. One-third of all stocks underperform riskless fixed-income instruments -- why take that risk?

One other way to consider the issue: turtle eggs. A female turtle lays thousands of eggs, and predators eat almost all of them. But the only way to ensure survival is to lay all of them. Do you think you can pick the one turtle egg in 10,000 that will survive?