For Individual Investors Risk-Free Investment Money Is Fantasy Money Securities with low investment risk and high investment returns are just fantasies.
No “risk-free” investment money is consistently and reliably available to individuals. Luck dominates skill in the securities markets. Clever investment selection is vastly over-hyped, and only the promoters tend to benefit. On average over long periods, investors get paid risk premiums, because they put their money at risk. If they control their costs, they get to keep most of these risk premiums.
Securities markets pay risk premiums and nothing more. While risk premiums that have been paid historically on asset classes have been highly variable and unpredictable, long-term averages demonstrate their existence. (See: What have average investment asset class risk premiums been over long periods? and How stable have common stock equity risk premiums been over time?)
In general, you should expect compensation only for some of the investment risks that you might bear. An optimal investment strategy is one that attempts to capture market risk premiums and to avoid the unnecessary and unproductive investment risks associated with individual securities. Someone will capture the risk premiums that the securities markets will pay. It might as well be you. (See: Asset class investment risk premiums — your reward for taking investment risk)
Suboptimal strategies are more likely to give these market risk premiums to someone else. Variations in returns surrounding the market return are largely a matter of luck. The more active an investment strategy is, then the wider the expected performance variation will tend to be. Competitive securities markets are real-time auction markets that make many smart people just average, and luck dominates skill. (See: Introduction to investment valuation and securities risk)
To believe that the securities markets will pay you more means that the securities markets will pay less to someone else. There is no magic money. Every ‘beat-the-market’ notion requires a patsy. Are you really likely to win consistently over the long term, because of a clever security selection method, a hot sector rotation strategy, or buying companies reported prominently in the media? How can you consistently win in these securities auction markets, when future asset values are fundamentally unknowable and your strategies duplicate those of so many others?
When luck overwhelms skill in investing, each individual needs to assess realistically whether he is likely to be among that very small minority who might possibly have superior [...]