I bristle when I read accounts – mostly from professionals with a monetary stake – that investing is too complicated for the non-professional. “Leave it to the pros,” they reason. “After all, you wouldn’t perform surgery on yourself.”
No, I wouldn’t perform self-surgery, but I attend to health through nutrition and exercise, as every adult should. I attend to adult responsibilities.
Managing finances is an adult responsibility – one every adult must undertake. Managing your finances – choosing your own investments included – is within the capabilities of any intelligent adult. Thanks to the Internet, tools to self educate (what you are reading, for instance) are readily available. Initiative is key.
Best of all, the market favors the individual investor. You hold a number of advantages over the professional you likely haven’t considered. Five spring immediately to mind.
How Individual Investors Can Beat the Pros
EXPENSES – When you pick your investments, you control expenses. Most online brokerages charge less than $10 per trade, and once you own the stock you incur no additional expense. Actively managed funds frequently charge 1% to 2% of money under management. Some even charge sales loads, which can range up to 5% of your investment.
If you are sufficiently wealthy to invest with a hedge fund, expenses ratchet up exponentially. Many hedge funds take 2% of money under management, and once a performance goal is exceeded – say 6% – they can take up to 25% of the gain on top of that.
You can pay dearly for someone else to manage your investments.
TAX MANAGEMENT – As an individual investor you pick when, where, and how long you invest. Professionals buy and sell with no regard for the individual investor. What’s more, many investment funds have a high degree of turnover, which can lead to ill-timed tax liabilities.
Constructing your own stock portfolio puts you in charge of taxes. A portfolio of high-quality dividend-growth stocks can be held for years, if not decades. No capital gains taxes are realized; only the dividends are taxed at the low qualified-dividend tax rate.
The more money you can invest, the more wealth you can build over time.
IMPERATIVES – Speaking of time, you have the freedom to let time work for you. There is no institutional imperative to beat a benchmark every 90 days. You have the luxury of holding whatever you want for as long as you want. You can hold stocks that temporarily lag the market (as all eventually do) that have the potential for outsized gains down the road.
With no institutional imperative driving your decisions, you have direct control over your wealth. You can invest as little or as much of your money as you want or you can simply hold cash. No competition forces your hand.
KNOWLEDGE – Yes, individuals have a knowledge advantage. Economist John Maynard Keynes offered insight to this advantage 80 years ago. Keynes observed, “The dealers on Wall Street could make huge fortunes if only they had no inside information.”
Keynes really refers to access to too much information. A constant bombardment of news, innuendo, and rumor within a clustered word compromises intelligent thought. Separating fact from fiction becomes more difficult. As an individual, you can easily distant yourself from the noise. To improve your decisions, sometimes all you need is a little quite contemplation.
SIZE – Size matters, and the smaller you are the more nimble you are. Most individuals can buy and sell a stock with no worry of moving the share price. In contrast, institutions frequently must invest millions of dollars in one stock. They must carefully parse the trade to avoid the share price moving against them. This takes time, and over time the price can still get away.
What’s more, the universe of publicly traded stocks is much larger for the individual. As size grows, the universe shrinks. Warren Buffett and Berkshire Hathaway (NYSE: BRK.a) only consider investments that can absorb billions of dollars – a very small universe. You, as an individual, consider investments that absorb thousands of dollars. Buffett has 50 investments options; you have 5,000.
I’m convinced that Income & Prosperity readers are intelligent adults – fully capable of picking their own stocks. But as I note, education is key. Our goal at Income & Prosperity, and other Wyatt Research services–such as High Yield Wealth–is not only to provide investment ideas, but to educate you so you can pick the ideas that best suite your needs. It’s the adult thing to do.
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