Tadas Viskanta is the founder and editor of the finance blog Abnormal Returns. Tadas has over twenty years of professional experience in the financial markets. He is also the author of the forthcoming book, Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.

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There has never been a better time to be an individual investor.

Said another way one could argue that we are in the golden age of the individual investor.  That might seem like an odd thing to say coming off what some people call a ‘lost decade for stocks.’  However over that same time period the technological advancements that made Web 2.0, like Facebook, Twitter and LinkedIn, possible have also led to unprecedented opportunities for investors not previously seen.

We are for the moment leaving aside the state of the markets at the moment.  We could have written this same post a couple of months ago when the stock market was 20% lower.  We are also leaving aside the issue of whether the zero interest rate policy of the Federal Reserve represents a “war on savers” or is simply the byproduct of necessary policies.  The failure of MF Global and the systemtic risks it poses for all account holders are also outside the scope of this post.

This is not a novel theme for us.  Indeed one thing we note in our forthcoming book, Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere, is that investing has never been “cheaper or easier.”  Some of this has to do with the rise exchange traded funds.  In other respects it has to do with the blossoming of the options markets.  In large part, it has to do with technology.  In short, never before have investors had access to data, analysis, opinion and social tools that are commonplace today. Let’s take these points one by one.

  1. Easier:  Investors today can with a brokerage account and a computer is now only a few mouse clicks away from a globally diversified portfolio of ETFs that in terms of expenses rivals what institutions paid a decade ago.  For all intents and purposes the expense ratio on the big ETFs is closer to 0.0% that 1.0%.  Many brokers now allow online trading of individual bonds and overseas securities.
  2. Cheaper:  Brokerage commissions continue to get driven towards $0 over time.  In fact, many brokers today provide commission-free trading of a range of ETFs.  Options strategies that would have been cost-prohibitive a few years ago are now viable strategies today.  Do you remember when you used to have to pay extra for real-time quotes?  Today those are a commodity.
  3. Richer:  The range of asset classes, sectors and strategies available via ETFs is truly dizzying.  It is even for interested parties hard to keep up.  Will most of these more exotic strategies fail?  Probably.  But sometimes a strategy, like low volatility investing, that is based in deep academic research, becomes available to investors.
  4. More social:  Blogging and microbloggging (StockTwits & Twitter) has opened up the world of idea generation to the masses.  Anyone with a computer these days can put their ideas out there.  The blogosphere and Twittersphere is a meritocracy, albeit imperfect, where the smartest and most generous contributors rise to the top.  The social model is pushing into things like earnings estimates with Estimize and institutional-grade services like SumZero.  Many bloggers these days make fun of the raft of ‘free’ webinars that go on these days.  But if you think about it the software and Internet speeds were not there to make mass online seminars possible not all that long ago.
  5. Smarter:  The raw material for investment analysis and trading is of course data.  Financial and price data is for the purposes of most individual investors is free these days.  Many firms are using data in interesting ways.  In the area of fundamental data some firms like Trefis and YCharts are making fundamental analysis easier.  A firm like AlphaClone allows you track the moves of (and invest) like the big hedge funds.  When it comes to portfolio level data firms like Wikinvest are aggregating account data making analysis easier for investors.

Most of the above discussion focuses on do-it-yourself investors.  However on the managed portfolio front things are changing for the better as well.

  1. Brokers vs. RIAsThe wirehouse brokerage model is going the way of the dodo bird.  Brokers and their clients now recognize in increasing numbers the conflicts inherent in that model.  Brokers are going independent as registered investment advisors in order to provide their clients with a conflict-free model.  That does not necessarily mean they are going to generate above-market returns, simply that these firms are no longer working at cross-purposes to their clients.
  2. Online access to managers:  Not only is the fee-only model taking hold.  It is taking hold online in a big way.  If you can eliminate, to a degree, the human element inherent in portfolio management you can also reduce the end cost to the investor.  Some firms that are operating in this space include:  Wealthfront, Personal Capital, Covestor and Betterment.

In the New York Times this past weekend there was an article talking about the many changes we are seeing through the analysis of “big data.”  The applications of big data has taken hold faster in the world of personal finance, like BillGuard, than it has in investing.  However one can easily see how access to data on individual trading decisions could make for an interesting recommendation engine.  In the end, more algorithmic investment tools and services coming one way or another.  The fact is that a simple, well-designed algorithm can do a better job of managing in real-time a portfolio than the vast majority of investors or investment advisors.

In many ways the automation of much of what constitutes investing today will be a godsend for investors.  The majority of investors really don’t want to manage their own portfolios.  Not do they a hyper-personalize portfolio.  An algorithmic service that managed in a low-cost fashion portfolios it would allow those investors to focus on the things over which they have some control.  The stuff of truly personal finance like:  savings rate, lifestyle choices and retirement options.

Sometimes in the midst of volatile markets we can forget just how far things have come.  Just a few years ago who thought you could trade a leveraged on $VIX futures.  But today you can.  Who would have thought you could buy an ETF for the Egyptian market, but you can.  However this example points out the double-edged sword that is today’s markets.  Now we do have access to all manner of investment and trading vehicles.  However like any tool these vehicles need to be used responsibly.  The vast majority of investors should likely take a pass.

The reason is that despite the many technological advancements we have seen in investing our brains are still largely hardwired for an age of scarcity.  That is why so many of the behavioral biases we have accumulated over time work against us when it comes to investing.  That is why we consistently buy high and sell low, i.e. the behavior gap.  That is why we oftentimes only seek out (and recognize) that information that conforms to our long held beliefs, i.e. confirmation bias.  In the end the most difficult hurdle to investment success is not the market environment or the range of investment vehicles, it is us.

So despite the advances we have seen, most investors would be well-served in investing in a low cost, globally diversified portfolio which they systematically rebalance and occasionally revisit.  The upside is that this sort of investment process is, as we said, now cheaper and easier than before. In the end no one knows what the markets will do, but the vast majority of investors can do more by doing less.

The full application of technology to the investment world will simultaneously open up novel areas of investment for adventurous investors and simplify the mechanics of portfolio management for the average investor.  Investors have to choose which path they will follow.  They simply need to recognize that their own, somewhat flawed brains, are coming along for the ride.

*I know I have likely omitted some very cool startups in the investing and personal finance space.  This is not meant to be a comprehensive accounting of the field.  Feel free to include in comments any interesting firms in this space.

Category: Apprenticed Investor, Financial Press

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Abnormal Returns: There has never been a better time to be an individual investor”

  1. DigDouggler says:

    As an individual investor, I’d also like to acknowledge the great benefit provided to me by the myriad of High-Frequency Trading (HFT) algorithms that churn the bid/ask stack like a school of adrenaline-charged sharks in a feeding frenzy.

    No longer do I have to be bored with placing a simple market order and have it be executed very near the current bid/ask. Instead, I’m now get to enjoy the excitement of watching the HFT’s front run my order, piledriving the bid down when I go to sell and rocketing up the ask when I go to buy, only to reverse milliseconds after my order completes. Thank you, HFT, for taking away the utility of the simple market order and forcing me to make every order a limit order in order to ensure that I don’t get worst possible execution.

    I also enjoy the stability and market transparency that HFT provides through such innovative and beneficial actions such as quote-stuffing and order cancellation. Why, to think that just 10 years ago the majority of orders had real intent to execute behind them. How quaint. Now, 95% of orders placed are cancelled within sub-seconds, feints by machines battling each other on time scales so brief that the physical location of servers to exchange hubs can now determine how profitable an HFT firm can be.

    I take great comfort that this market volume comprised mainly of phantom orders will provide stability and liquidity in all conditions; and that flash crashes in individual stocks are just momentary aberrations and nothing to concern myself with.

    Yes, it is truly a great time to be an individual investor.

  2. stonedwino says:

    “There has never been a better time to be an individual investor.” You have got to be kidding me?

    Most individual investors have been burned (and then some) over the last ten to fifteen years, on several occasions, by the high frequency trading casino game and they have learned the hard way that Wall Street is not safe for small investors. Why do you think individual small investors have stayed away in droves? Duh!? Good luck with that meme guys…It’s like talking to a wall, because no one is listening any more….that horse left the stable a looooong time ago. You are years late in trying to close the barn door. Wall Street will reap what is sowed….Karma is a fucking bitch guys!

  3. stonedwino says:

    I have been investing every penny I have into my own business – I know what the risk is, I know who I’m dealing with, I know what the return is and I know what I’m investing in…you guys can go pound salt…

  4. stonedwino says:

    DigDouggler Says:

    “I also enjoy the stability and market transparency that HFT provides through such innovative and beneficial actions such as quote-stuffing and order cancellation. Why, to think that just 10 years ago the majority of orders had real intent to execute behind them. How quaint. Now, 95% of orders placed are cancelled within sub-seconds, feints by machines battling each other on time scales so brief that the physical location of servers to exchange hubs can now determine how profitable an HFT firm can be.

    I take great comfort that this market volume comprised mainly of phantom orders will provide stability and liquidity in all conditions; and that flash crashes in individual stocks are just momentary aberrations and nothing to concern myself with.”

    Dude, you nailed it!

  5. theexpertisin says:

    There has never been a better time to be an investor.

    There has never been a worse time to be an investor.

    Yes, indeed, to both.

  6. Dick Watson says:

    I agree with the above comments. Wall Street is reaping what it sowed.

    The new investor entering the market right now has TOO MUCH information pulling him in too many different directions. Some of it may be useful, but most of it is either BS, or will be misinterpreted or misused.

  7. louiswi says:

    Well, it seems there is no question about it now. Al Swearenger was speaking of High Frequency Traders when he so wisely stated: “Once we string up a couple of these cocksuckers, this shit’ll stop”. Who else could he possibly been referring to?

  8. “There has never been a better time to be an individual investor.”

    “The failure of MF Global and the systemtic risks it poses for all account holders are also outside the scope of this post.”
    ~~

    so much like..”other than that, Mrs. Lincoln, How did you enjoy the Play?”
    ~~

    “Wall Street is reaping what it sowed.”

    maybe, “Wall Street is raping what others have Sown”, could go with that sentiment..
    ~~

    I agree with the above comments.

    x2

  9. VennData says:

    The above comments are misleading. All that “Social,” “Smarter,” and “Algorithms” will mean in aggregate all those individual investors will on average, do average, but the more time and money they spend, on average, will be worse than average.due to costs.

    So design an asset allocation like 70% equities, 30% bonds. Use low-cost index mutual funds or ETFs and rebalance once a year if you get away from the original asset allocation. That’s it. You will be guaranteed to outperform the average, due to cost, year in year out and you will probably out perform the vast majority of the others over the long run.

    Think Jack Bogle.

  10. bigal says:

    Agree. Here is a spoof of the e-trade baby when he loses everything within 60 seconds because of the speed of his own stupidity –> http://www.youtube.com/watch?v=AYrpROr9Gmk

    It is funny because it is true, it has and will happen.

    Big Al

  11. gordo365 says:

    Putting the BR “causal thinking” cap on, I don’t get the sense that any of the things on the list are required to get better returns.

    I would think the “its never been a better time to be an individual investor” sentiment would include something about better returns or results. I’d much rather have to call a broker and pay $50 per transaction in a market that wasn’t going sideways for 20 years with PEs contracting – than have instant access to free trades in a junk market environment.

    Half the list includes things that have been shown to REDUCE returns:
    - easy and cheaper trades – individual investors that “trade” more – do worse than those who sit tight more
    - more social – are you kidding me? How do I know which bloggers give advice that provides above average returns? If I follow bloggers advice blindly – I have 50% chance of doing worse than average. Or something like that. I was never very good at statistics.
    - more data – the assumption being that access to more data produces better results. Not sure about that.

    BUT – one cool thing about this new environment – I can set up a portfolio of low cost ETFs in a brokerage tool and click a single button once in a while to re balance the whole model.

    Now all I have to do is get clients to pay me 2% annually to do that for them – and I can be assured of being better than half the investment advisers :)

  12. Concerned Neighbour says:

    In many ways I agree it’s a great time to be a personal investor. I have an unprecedented number of inexpensive investment vehicles available to me no more than a mouse-click away.

    For me at least, this good stuff does not outweigh the bad, which includes:
    1. Financial statements we can’t trust due to mark-to-fantasy
    2. Consequence-less white-collar crime
    3. HFT front-running and quote-stuffing
    4. Incompetent and/or complicit regulatory authorities
    5. The death of price discovery thanks to reckless central bank monetary policy

    I could go on. Bottom line, I don’t trust a single penny of savings in this viper den called Wall Street, nor has it given me any reason to do so.

  13. willid3 says:

    and we don’t even count the ways that wall street has you in the cross hairs. they make sure that you can save money when they mess up by not letting you get awarded any thing at all. they make sure they get their money, by getting their trades in 1st, leaving you with leavings over. and then they make sure their regulators (the ones they own) don’t enforce any rules that might impact their profitability.

  14. Francois says:

    When a well known investor like Marc Faber declare in the faces of CNBC drones “Above all, I don’t invest in the United States at the moment!” (Drones’ faces were quite the poem to watch!) to add “I do not trust ANYONE”, pray tell how can this be a good time to be an investor, individual or institutional.

    BTW Tadas Viskanta, did you notice what PIMCO did in relation to the SFA? Do you also happen to know whwere MF Global customers’ money is? Check it out and you tell me if investors, big and small have ANY reason whatsoever to feel confident in the US markets.

  15. sellstop says:

    Lots of vitriol regarding HFT. I don’t use stop orders and I haven’t had a problem with HFT. And some things never change. I remember my stoploss orders in the OJ pit always got hit and then the price just went the way I thought it would. OJ was infamous tho. Same with bean oil and all the others. Nothing has changed, it is just there are more naive participants to fleece. The message boards are the same as they were then. Same old questions, answers and myths…. Learn to trade well and the HFT won’t be a problem. High Frequency does not affect the long term trends or even the short term trends. They buy and they sell. The average of that is zero.
    I honestly have seen all this hubbub about HFT and I don’t see the problem. And I trade nearly every day.
    Just sayin. Are your guys trading from your blackberry at work?

    http://www.ghickeyblog.blogspot.com

    gh

  16. bdg123 says:

    Those closest to the epicenter of the bubble are least likely to recognize rationalizations rather than truth. That truth is likely to be that the investor class is completely wiped out before this cycle of madness ends. Haven’t been over here in a long time. Hope all is well and wish you the best if uncontrollable turmoil is that final outcome.