Luck of the Draw? There's a Lot More to Trading and Investing than Luck

Investing results may depend to some extent on luck, but research and science play a larger role in portfolio strategy. Lucky? A Little Bit Helps, but You Need More Than That
2 min read
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Key Takeaways

  • Nearly two-thirds of actively managed, large-cap funds failed to beat the S&P 500 index in 2018
  • Luck and timing may factor into individual investor’s results, but research, diversification and other practices can be key components

Whether it’s blind luck, dumb luck or some other variety, it’s human nature to attribute successes or failures to unseen forces or to chance, as opposed to our own actions. So, what role does luck play in investing strategy and results? One thing’s for sure: The money you’re stashing away for retirement, college tuition or anything else isn’t something that should be left to chance.

Many well-paid investing professionals apply many different methodologies and tactics aimed at picking the right stocks at the right time. Their decisions affect millions, if not billions, of dollars. But to Daniel Kahneman, a Nobel Prize-winning Princeton University psychologist, much of the efforts of market timers and stock pickers can be attributed to randomness.

“There is a general agreement among researchers that nearly all stock pickers, whether they know it or not—and few of them do—are playing a game of chance,” Kahneman wrote in his 2011 book Thinking, Fast and Slow

The subjective experience of traders “is that they are making sensible, educated guesses in a situation of great uncertainty,” Kahneman wrote. But in efficient markets, “educated guesses are no more accurate than blind guesses,” he wrote.

Kahneman’s take in 2011 wasn't exactly new. In his 1973 book, A Random Walk Down Wall Street, Burton Malkiel, another Princeton economist, wrote that the market prices stocks so efficiently that “a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs as well as those managed by the experts.”

There is some evidence that backs up such “random walk” theories. 

In 2018, nearly 65% of large-capitalization funds underperformed the S&P 500 index, according to S&P Dow Jones Indices. It marked the ninth consecutive year a majority of large-cap fund managers failed to beat the S&P 500, underscoring the belief that an “active” approach to stockpicking can’t keep pace with a more “passive” tack of simply trying to match the performance of broader market benchmarks.

Still, there’s another old saying worth remembering: Luck is the residue of design.

In other words, luck and timing might factor into investing results. But using your head, doing your homework and recognizing what you can and can’t control still matter. Here are a few straightforward ways investors can tilt the odds in their favor.

Know Yourself and Establish a Disciplined, Well Thought-Out Strategy 

What kind of investor or trader are you? Where are you in career and life? What’s your tolerance for risk? Those are just a few fundamental questions to consider as you chart your investing course. For example, a 25-year-old may want to consider a more aggressive portfolio strategy than someone who’s 55 and eyeing retirement. Also, define your short, medium and long term investing goals and think of potentially life-changing events that may alter those goals or compel changes to your portfolio.

Don’t Put All your Eggs in One Basket: Diversify

Through diversification, investors spread their portfolio across a variety of assets (stocks, bonds, mutual funds, etc.) that aren’t always correlated, which can help insulate them against market turmoil or downturns in any single stock. 

Diversification isn’t an end unto itself. As markets change, it’s a good idea to regularly check your portfolio to make sure you’re not overexposed to any specific stock or industry, said Viraj Desai, senior manager, portfolio construction at TD Ameritrade.

“Factors such as market capitalization, international versus domestic holdings and sub-sector exposure all deserve consideration as you build a well-diversified portfolio,” Desai said. “Making sure you have a deeper mix within your asset allocation strategy is an important step.” Investors can use a variety of tools to assess their diversification, such as the Portfolio X-Ray tool available on

Research, Research, Research

Most publicly-traded U.S. companies report quarterly financial results (and other “material” information) to the Securities and Exchange Commission, and many of those companies are followed by industry analysts at Wall Street banks and elsewhere. That means there’s a wealth of information available, free, for investors to absorb. 

Are analysts bullish, bearish or neutral on a company’s stock price over the next year or so? What’s the Wall Street consensus on the company’s next quarterly per-share earnings number? TD Ameritrade clients can access a world of research under the Research & Ideas tab on See figure 1 below.

FIGURE 1: BETTER THAN A DARTBOARD. Access fundamental and technical indicators, news, sentiment, and 3rd party analysis under the Research & Ideas tab on the TD Ameritrade website. For illustrative purposes only.

Though long term investors typically rely on fundamentals, many market professionals use technical analysis—moving averages, momentum indicators and other patterns—to help inform their trading decisions. That doesn’t mean you have to do the same thing. But it’s still a good idea to call up a chart of a stock you own or are considering buying, at least to get the lay of the land.

Where’s the stock price compared to a month ago, a year ago, or five years ago? Does the market seem to know something you don’t? Perhaps you’re eyeing a stock that’s taken a beating and may be poised for an upturn. What’s the chart telling you? If you see a pattern of lower highs and lower lows, maybe the time to buy isn’t right.

Pay Attention, Stay Informed, Watch the Calendar

You don’t have to be a professional money manager or trader to keep tabs on the markets. Long term investors should stay engaged by reviewing their portfolios periodically—monthly, quarterly or at least annually—to make sure you stay on track. If you prefer a more hands-on approach, you could even check in on the markets every day, and stay aware of upcoming events that may move a stock’s price or the broader markets—quarterly earnings reports, economic data, elections and more. But if you do, make sure you don’t get too caught up in the day-to-day minutiae that you make emotionally-based trades that don’t serve your long term objectives. 

Prepare for Market Volatility and Downswings; Don’t Panic

Past performance is not a guarantee of future results, as investors are often reminded. Markets don’t go up forever or down forever (sometimes, markets just go sideways), and sometimes, strange stuff happens that even the experts didn’t anticipate. That makes it important for investors to be cognizant of potential geopolitical turmoil, natural disasters and so-called Black Swan events that can roil markets from Tokyo to London to New York. It’s happened before and it will likely happen again.

Keep an eye on volatility readings, such as the Cboe Volatility Index (aka, the VIX or “fear gauge”), to get a sense of the market’s relative level of calm or skittishness. Also, consider hedging strategies that could offer some protection if markets nosedive.

Whatever happens, it’s important to keep your wits about you and stay level-headed. In the end, it’s not about luck. The more investors prepare themselves, the better positioned they may be to find success in the long game.


Key Takeaways

  • Nearly two-thirds of actively managed, large-cap funds failed to beat the S&P 500 index in 2018
  • Luck and timing may factor into individual investor’s results, but research, diversification and other practices can be key components

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