TMFPostOfTheDay (< 20)

What's an Average Investor to Do?

December 11, 2012 – Comments (2)

Board: Macro Economics

Author: WatchingTheHerd

Looking at the history of the market over the last 15 years, I would guess that probably 60-70 percent of the profits produced in financial markets probably went to 5-10 percent of individual investors. The other 90-95 percent of individual investors probably treaded water at best while a few bet on dogs at the worst possible time or failed to cash out gains of legitimate gainers and wound up losing quite a bit.

It's a safe bet that the 5-10 percent that did well and kept their profits were smart enough to manage their portfolios on their own. Show of hands... Has ANYONE here heard a story of a friend getting called by a broker saying "Hey Joe, I think we really need to dump your XYZ position -- it seems priced for perfection and my firm's research department has some questions about their last 10k..." a month before XYZ drops 10 or 20 percent?

Me neither. That's right up there with "That's the banjo player's Porsche" on the list of "Things You Never Hear."

I am convinced that for average individuals whose income only yields $5000 to $20,000 per year in "investable" disposable income, their time is MUCH better served first focusing on careful management of their health (to avoid the onset of chronic issues later which can cripple them literally and financially) and management of their basic household budget (LBYM) to just SAVE money. When interest rates are virtually zero and risk-adjusted stock returns are in the 3-5 percent range if you're GOOD and know what you're doing, the "opportunity cost" of not actively investing money is nearly zero. For the non-sophisticated investor, the risk-adjusted cost of investing may be quite high if they are churned through an ever-changing list of broker favorites and "special deals" on things like Jefferson County Alabama sewer bonds, etc.

The average would-be investor is probably better off just keeping things simple, minimizing or eliminating the use of credit and avoiding the stress of handing their money over to a system they don't understand through a third party that probably doesn't deserve to be trusted.


WTH