Investing Luck: Is It Chance or Skill?

In my opinion, skill and chance both play a role in producing exceptional portfolio performance. Where investment advisors can really add value is in using their expertise to mitigate "bad luck"–i.e., bad things that are unpredictable.

Clients often assume that an advisor's skill consists mainly of choosing investments. But even Warren Buffett, a master stockpicker, uses diversification to minimize the negative impact of random events. There's always a butterfly flapping its wings in Namibia that will eventually create an unforeseen problem somewhere in the market.

For the average advisor, I think the ability to develop a bad-luck-resistant diversification strategy may be even more important than being able to pick investments. Over time, the odds are better than 50-50 that a well-diversified portfolio will gain value. You can't beat that in Las Vegas.