The Gambler's Fallacy and XEQT: Why 'The Market Has to Drop Soon' Is Terrible Investment Advice

In the summer of 2024, my friend Priya and I were sitting on her back deck in Kitchener, beers in hand, talking about money. She’d just gotten a $12,000 bonus at work, and she’d already decided it was going into her TFSA. Smart move. She’d been reading about XEQT for months and was ready to pull the trigger.

Then she looked at the chart.

“It’s been going up for like two years straight,” she said, tilting her phone toward me. “It has to come back down at some point, right? I mean, it can’t just keep going up forever. I’ll wait for the dip.”

I told her to just buy it. She told me I was being reckless. We agreed to disagree. She put the $12,000 in a savings account earning 3.5% and set a price alert for a 10% correction.

That correction never came. XEQT kept climbing through the fall, through the winter, and into 2025. By the time Priya finally gave up waiting and invested the money – almost eleven months later – XEQT was about 14% higher than when she’d first been ready to buy. Her $12,000 had earned roughly $350 in savings interest. If she’d invested immediately, she would have been up about $1,680. The “smart” decision to wait cost her over $1,300.

The worst part? When I asked her why she’d been so sure a dip was coming, she said something I’ve heard a hundred times: “It had been up for so long. It just felt like it was due for a drop.”

That feeling has a name. It’s called the gambler’s fallacy. And it is one of the most expensive cognitive biases in investing.

1. What Is the Gambler’s Fallacy?

The gambler’s fallacy is the mistaken belief that if something has happened more frequently than normal in the past, it is less likely to happen in the future – or vice versa.

The classic example comes from the casino. Imagine you’re watching a roulette wheel. It has landed on red seven times in a row. Your gut screams: “It HAS to be black next. Red can’t keep coming up.” So you bet everything on black.

But here’s the thing: the roulette wheel has no memory. Each spin is completely independent of the one before it. The probability of red on the eighth spin is exactly the same as it was on the first spin – roughly 47.4%. The wheel doesn’t know it landed on red seven times. It doesn’t care. It doesn’t “owe” you a black.

This seems obvious when I spell it out with roulette. Nobody seriously believes a roulette wheel remembers its previous spins. But take that exact same faulty logic and apply it to the stock market, and suddenly very smart people start nodding along:

• “The market has been up for three straight years. It’s due for a correction.”
• “XEQT already dropped 15%. It can’t drop much more.”
• “We haven’t had a recession in over a decade. One has to be coming soon.”
• “This bull run is too long. Something has to give.”

Every one of these statements is the gambler’s fallacy wearing an investing costume. And every one of them has cost real people real money.

2. How the Gambler’s Fallacy Shows Up in Your Portfolio

The gambler’s fallacy doesn’t announce itself. It disguises itself as prudence, caution, and common sense. Here are the three most common ways it sneaks into investment decisions:

“The market has been up too long”

This is the most widespread version. Markets have been rising for a year, two years, three years, and investors start to feel like the gains are “borrowed” somehow – like the market is running up a tab that it will eventually have to settle. They sit on cash, convinced that buying now would be buying at the top.

I hear this constantly in Canadian investing forums. Someone posts about buying XEQT, and within three comments, somebody replies: “I’d wait. This bull market is getting long in the tooth.” As if bull markets have an expiration date printed on the bottom.

“It already dropped, so it’s safe to buy now”

This is the gambler’s fallacy in reverse, and it’s just as dangerous. An investor sees XEQT down 12% and thinks, “Well, it’s already dropped a lot. It can’t go much lower.” So they go all-in, expecting a bounce.

But a stock or ETF that’s dropped 12% can absolutely drop another 12%. Or 20%. Or more. The 2008 financial crisis saw global markets fall roughly 50% from peak to trough. If you’d jumped in after the first 15% drop, convinced “it can’t go much lower,” you would have endured another 35% of pain.

“It’s been flat, so it must be about to move”

Some investors see a market trading sideways for months and conclude that a big move is “building up” – that the market is like a compressed spring that must eventually release. They try to position themselves for the breakout, often guessing the wrong direction.

In all three cases, the underlying error is the same: treating past market movements as if they mechanically determine future ones. The market went up, so it “must” go down. It went down, so it “must” go up. It went sideways, so it “must” break out. Each of these is the gambler staring at seven reds and betting the farm on black.

3. Why Markets Are Not Coin Flips

Here’s where the gambler’s fallacy gets really insidious in an investing context. With a roulette wheel or a coin flip, each event genuinely is independent. Past results truly don’t affect future outcomes. But investors often take this logic and apply it backward: “If coins and roulette wheels are independent, and markets aren’t exactly like coins, then maybe past market movements DO predict future ones.”

They’re half right – but they draw exactly the wrong conclusion. Markets are not like coin flips. But the difference makes the gambler’s fallacy worse, not better.

Here’s why. A coin has no memory and no momentum. Markets have both.

Markets have momentum

Decades of academic research have documented the momentum effect in stock markets. Stocks and markets that have been going up tend to continue going up in the short-to-medium term. Stocks that have been going down tend to continue going down. This is one of the most robust findings in all of finance.

So when someone says “the market has been going up for two years, it has to come down” – they’re not just committing the gambler’s fallacy. They’re actually betting against one of the most well-documented patterns in financial markets. Bull markets don’t die of old age. They die from specific causes: recessions, financial crises, central bank policy errors, or exogenous shocks.

Markets are driven by fundamentals

A roulette wheel has no underlying economic engine. The stock market does. When XEQT goes up for three years straight, it’s not because of luck or randomness. It’s because the 9,000+ companies inside it are collectively growing their revenues, earnings, and dividends. The global economy is expanding. Innovation is creating new value. Productivity is increasing.

A bull market built on genuine earnings growth is nothing like a lucky streak at the casino. It’s a reflection of real economic activity. It can absolutely continue for years – and historically, it often does.

Markets have a permanent upward bias

This is the big one. A coin flip is a 50/50 proposition. The stock market is not. Over long periods, the stock market goes up far more than it goes down, because the global economy grows far more than it shrinks. Expecting the market to drop simply because it’s been going up is like expecting your salary to drop because it’s been rising. The baseline trend is upward, and the burden of proof lies on the claim that something will reverse that trend – not on the claim that it will continue.

4. Markets Spend Far More Time Going Up Than Down

If the gambler’s fallacy were correct – if long winning streaks made losing streaks “due” – then we’d expect markets to alternate fairly evenly between up years and down years. They don’t. Not even close.

Here’s what the historical record actually looks like for the S&P 500:

The market is positive roughly three out of every four years. That means the “default setting” of the stock market is up – not flat, not random, and certainly not alternating. When you sit in cash waiting for a down year that’s “due,” you’re betting against a 3-to-1 historical ratio.

And here’s another fact that demolishes the gambler’s fallacy: bull markets are significantly longer than bear markets. The average bull market since 1950 has lasted roughly 5.5 years. The average bear market has lasted about 10 months. Markets spend approximately 80% of their time in bull territory and only 20% in bear territory.

So when someone says, “This bull market has been going on for three years, it’s too long” – three years isn’t even the average length of a bull market. It’s below average. The bull market from 2009 to 2020 lasted over 11 years. The one from 1990 to 2000 lasted a full decade. Saying a three-year bull is “due” for a correction is like saying a 25-year-old is “due” for retirement.

5. The Staggering Cost of Waiting

Let’s put real numbers to the gambler’s fallacy. What does it actually cost you to sit in cash for one, two, or three years, waiting for a crash that may or may not materialize?

Assume you have $25,000 to invest in XEQT. You’re convinced the market is “due” for a correction, so you park it in a high-interest savings account at 3.5% while you wait.

Waiting just one year costs you over $3,000. Waiting three years costs nearly $9,000. And if the gambler’s fallacy keeps whispering “just wait a little longer” until you never invest at all, you leave almost $19,000 on the table over a decade – on just $25,000.

Now multiply that across a lifetime of investing. If you’re making $500 monthly contributions and you delay starting by two years because you’re convinced a crash is imminent, the cost of waiting compounds into tens of thousands of dollars over a 25-year investing horizon.

The gambler’s fallacy doesn’t just make you feel nervous. It makes you measurably poorer.

6. XEQT’s Global Diversification Makes Timing Even More Futile

Here’s something that makes market timing especially hopeless for XEQT investors: you’re not just trying to time one market. You’re trying to time all of them.

XEQT holds four underlying iShares ETFs covering:

• U.S. stocks (~45% of the portfolio)
• International developed stocks (~25% – Europe, Japan, Australia, etc.)
• Canadian stocks (~25%)
• Emerging market stocks (~5%)

These markets don’t move in perfect lockstep. The U.S. market might be rallying while European markets are flat. Canadian energy stocks might be surging while Japanese tech stocks are dipping. Emerging markets might be booming while the S&P 500 corrects.

To successfully time XEQT, you would need to predict not just whether “the market” is going to drop, but whether the weighted combination of U.S., Canadian, international, and emerging markets is going to drop simultaneously and severely enough to justify sitting in cash. Good luck with that.

This diversification is actually one of the strongest arguments for why XEQT is such a powerful investment. When one region struggles, others may be doing well, smoothing out your overall returns. But that same diversification makes it nearly impossible for a single macro prediction to correctly forecast the direction of the entire portfolio.

The gambler’s fallacy is hard enough to overcome when you’re trying to predict one coin flip. XEQT is like trying to predict 9,000 coin flips across 49 countries simultaneously. The only rational response is to stop trying.

7. How to Beat the Gambler’s Fallacy (For Good)

Understanding the gambler’s fallacy intellectually is step one. But knowing about a cognitive bias doesn’t make you immune to it. You need systems that protect you from your own brain. Here are four that work:

Set up automatic contributions and never turn them off

The single most effective defense against the gambler’s fallacy is dollar-cost averaging – investing a fixed amount on a fixed schedule, regardless of what the market is doing.

When your $500 goes into XEQT automatically every two weeks, there’s no moment where your brain gets to say “but the market has been up for too long.” The decision is already made. The money moves before your cognitive biases can intervene. You buy at highs, you buy at lows, and over time, you capture the full long-term return of the global stock market.

Stop checking your portfolio

Every time you open your brokerage app, you give the gambler’s fallacy fresh ammunition. You see green and think “it can’t keep going up.” You see red and think “it must be about to bounce.” Either way, you’re tempted to act on a pattern that doesn’t exist.

Check your portfolio quarterly at most. Better yet, set up automatic contributions and check semi-annually. The less you look, the less opportunity your brain has to manufacture false patterns.

Set rules in advance and follow them

Before any market volatility hits, write down your investing rules. Something like:

1. I invest $X on the 1st and 15th of every month, no matter what
2. I do not sell during market declines
3. I do not increase or decrease my contributions based on recent market performance
4. I rebalance once per year on a fixed date
5. I do not make investment decisions based on headlines or gut feelings

Put this somewhere you’ll see it when markets get scary. Having pre-committed rules removes the gambler’s fallacy from the equation, because the decisions are already made before the bias kicks in.

Study the history

When you feel the urge to say “the market has to drop soon,” go look at a chart of the S&P 500 or the MSCI World Index from 1970 to today. Find every point where the market had been rising for two or three straight years. Now see what happened next. In the majority of cases, it kept rising. Sometimes it eventually dropped – but the drop still left investors above where they would have been if they’d sat in cash waiting for it.

Seeing this pattern repeatedly, across decades and across countries, is the best antidote to the feeling that a correction is “due.” The data consistently shows that buying at all-time highs works out just fine, and that the cost of missing the best days by sitting on the sidelines dwarfs any benefit from avoiding the bad ones.

8. The Market Doesn’t Owe You Anything

Here’s the fundamental truth that the gambler’s fallacy obscures: the market has no memory, no sense of fairness, and no obligation to balance things out.

A roulette wheel doesn’t owe you a black after seven reds. A coin doesn’t owe you heads after five tails. And the stock market doesn’t owe you a crash after three good years. It never has, and it never will.

The market is driven by earnings, innovation, demographics, productivity, and the collective effort of billions of people working to improve their lives. As long as those forces persist – and they have persisted through world wars, pandemics, financial crises, and every other catastrophe – the long-term trajectory of the global stock market will be upward. Not in a straight line. Not every year. But unmistakably, relentlessly upward.

Every month you spend in cash waiting for a correction that’s “due” is a month you’re fighting against that trajectory. Every dollar sitting in a savings account earning 3-4% while XEQT earns a long-term average of 8-10% is a dollar being slowly eaten alive by opportunity cost.

Priya eventually figured this out. She bought XEQT in the spring of 2025, set up automatic biweekly contributions, and stopped trying to predict the next dip. When I asked her about it recently, she said something that stuck with me: “I spent almost a year trying to be smarter than the market. Turns out the smartest thing was to just stop trying to time it and buy.”

She’s right. The gambler’s fallacy wants you to believe that the next spin, the next month, the next quarter will be different – that the pattern is “due” to break. But there is no pattern. There is only a long-term upward trend and the noise around it. Your job as an investor is to capture the trend and ignore the noise.

Set up your automatic contributions. Buy XEQT on schedule. Stop staring at charts. And the next time someone tells you the market “has to drop soon,” smile, nod, and keep investing. Your future self will thank you.