A few months ago, I went to the AICPA's personal financial planning conference in Las Vegas, and there was an interesting contrast between what was going on at the gaming tables and the investment discussions we were having during the meeting. At the same time, I was participating in an online conversation about macroeconomics on the Financial Planning discussion forums when the discussion veered unpredictably into a heated debate about beating the market, and the pros and cons of market timing.

There's a lot we can learn from the contrasts between gambling and investing. Exploring them might not only inform conversations with clients, but also clarify the profession's role in tending client portfolios.

LOOKING AT THE ODDS

The first and most obvious contrast between gambling and investing is the odds. Years ago, I created a spreadsheet that calculated, down to two decimal places, the odds of various bets at a casino. The roulette wheel was pretty easy, blackjack and craps were somewhat harder, but at the end of the exercise, I determined that the closest thing to a 50-50 bet in a Vegas casino is the Don't Pass line at the craps table, where you consistently bet against whomever is rolling the dice.

The odds for that particular bet are something like 49.32-50.68, which in the real world means that if you play long enough, you'll eventually lose roughly 1.3 cents for every dollar you put on the table. It's pretty cheap entertainment, but not exactly a fast road to riches. And I'm told that the veteran gamblers look at you funny when you stick with the Don't Pass line roll after roll after roll, especially when you shriek with happy excitement every time they crap out.

The best wager in Vegas pales next to the odds at the investment "casino," where long-term returns of U.S. large-cap stocks (dividends included) have averaged anywhere from 9.4% a year (if you're counting since the end of 1899) to 11.2% annually (if you're just counting the last 25 years). Even the Lost Decade, which is comparable to the worst run of luck you're ever likely to encounter in the casino, offered odds in your favor.

True, the Wilshire 5000 was off -0.2% annually over the 10 years ending Dec. 31, 2009, but Wilshire's mid-cap index gained 4.6% a year, and its small-cap index was up 4.3% annually. The EAFE developed markets index also lost 1.1% each year during that time.

But if your clients rebalanced among all these asset classes at least annually, and at best opportunistically, reinvested dividends and included a reasonable percentage of bonds in the portfolio, they would have finished the Lost Decade with aggregate returns somewhere north of 3% a year. Maybe you're not shrieking in triumph, but at least you're beating the inflation rate and growing your purchasing power.

So the first beneficial role that the investment advisor plays in a client's financial life is to make sure that he or she is still "playing" in the "investment casino," since the longer you play, and the more astutely you do it (by reinvesting dividends, rebalancing and staying diversified, for example), the more you can grow the chips on the table. And, as it happens, this is where a lot of market "players," operating on their own, don't seem to quite measure up.

Based on fund-of-flows data, Morningstar has calculated that the average investor gets about 1.5 percentage points less a year than the market offers them. This happens because they are moving in and out of the market at the wrong times, chasing hot funds just as they're about to cool off and abandoning underperforming funds right before a turnaround takes place. This is normal human behavior, of course.

In the casino, too, you see a lot of people putting money on those dumb sucker bets at the craps table, not knowing how to play their blackjack cards to best advantage or sticking coins in the slots, where the odds are preordained to work against them. (I suspect that if everybody stuck to the "Don't Pass" line on the craps table, the casinos would quickly go out of business.)

WINNERS AND LOSERS

But what does this discussion have to do with market timing and beating the market? If we define market timing as being either in or out of the market based on some set of signals, the first thing to notice is that this activity reverses those positive stock market odds.

To the extent that we are out of the market, we're making a bet that the indexes won't go up during that time-and since the markets tend to go up 60%-70% of the time (depending on the asset class), this turns the market's strong positive odds to strong negative ones. It takes a lot of skill to overcome the unfavorable odds that pure market timers have set for themselves with their actions.