Imagine the following scenario: you have the chance to earn some money based on the flip of a coin. The rules of the game are simple – you hire a coin flipper, and each time the coin comes up heads, you get paid three dollars. When the coin comes up tails, you lose one dollar. You, as the participant, only know past track records; you have no guarantee that the past will repeat itself.

You hire the first professional coin tosser and the first three tosses are all tails. You appear to have the wrong flipper, so you talk to a friend who has a more successful relationship. In fact, your friend has experienced three tosses and got three heads in a row. It’s hard to argue with such a track record so, at some expense, you switch to the superior tosser.

For some reason, as soon as you show up, tails start coming up everywhere. To make matters worse, the flipper you just fired got named Coin Flipper of the Year based on a remarkable string of heads attributed to a superior technique. You give up the game in disgust and advise all others to do the same if they value their nest eggs.

If we look at the game objectively, it’s a sure winner. The coin tosses will inevitably even out and the heads pay off three times the rate of losses from tails. Since it is only a matter of time before the inevitable 50/50 pattern establishes itself, your job is really to hang on long enough.

The coin tossing analogy has a few things in common with investing in the stock market. Historically, the market goes up about three times as often as it goes down. You cannot predict the short-term direction of the market any more than you can predict a coin toss, and investing in the market has random elements that require inordinate amounts of patience from investors.

There’s more to investing in stocks than flipping coins, but what every investor needs to separate out is what parts of investment management are skill and what parts are, essentially, random circumstance.

A University of Chicago researcher, Kenneth French, undertook a study on this very subject. Professor French is a finance researcher and statistician who set out to find how many observations it takes to eliminate what is known in the statistics world as noise. In other words, how long do you need to measure stock portfolios before the observations reveal something that is true versus something that is just statistical noise?

The news is not good for people looking to make accurate decisions in short time periods. Professor French’s study concludes that it takes a minimum of 15 years before you can be assured that you are measuring something besides random patterns. So even stellar track records of 10 years could be nothing more than a portfolio that happened to be in growth stocks when growth stocks were having a good run.

Kenneth French goes on to observe that many of the things we take for granted about capital markets – stocks earn more over time, value stocks earn more than growth stocks, and bonds do worse at fighting inflation compared to stocks – are absolutely true only if the time period is long enough. Bonds, for example, will out-perform stocks over five years about 30% of the time. Value stocks return the most over the long run, but there will be extended periods where value stocks dramatically underperform growth stocks. Stocks beat inflation over the long haul but a quick look at the charts will tell you that, in the short term, stocks don’t like inflation any more than bonds do.

So what can an investor do to avoid chasing the equivalent of the hot coin flipper? Here are a few suggestions:

1) No one knows where stocks will go in the short term, so don’t buy them for the short term.

2) A broadly diversified portfolio of value stocks with good dividend yields will continue to be an excellent long-term investment.

3) The shorter your time horizon, the more conservative you need to become.

4) Inflation will take away half your money every twenty years, so don’t buy short-term investments to fight long-term inflation.

5) Finally, stay invested long enough to let the random noise disappear.

Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000 of assets make smart decisions about money. He is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.