Saturday, February 6, 2016

Wall Street’s ‘Unfairness’ Shouldn’t Scare the ‘Little Guy’ Out of the Stock Market

In an article for MarketWatch titled Wall Street will always crush the little guy, but the stock market could be fairer, Victor Reklaitis and William Watts did their beats to scare the wits out of we, the “little guys.”

I left these comments:

I am a union plumber, and my wife is a school secretary—presumably the very people who are supposedly “crushed” by Wall Street. Yet we weren’t “left behind,” because we chose not to be.

One doesn’t have to be a financial expert to learn and implement sound investment strategies. There’s no need to worry about “the pros” and their supposed “advantages unavailable to the average investor”: There’s no need to “compete” with them. One only needs knowledge of basic investing principles, common sense, and perseverance.

Bear markets? The bears of 1981-82, 1987, 2000-01, 2007-09 worked in our favor. Wall Street “scandals?” We sailed through them, too. Flash crashes; conflicts of interests; “rigged” markets; high-frequency trading; CEO pay; insider access to data and information; “uneven” playing fields; blah blah blah? Who cares? It’s all noise—provided you think long-term and have a sound investment strategy and make regular contributions through thick and thin. I’m much more worried about government meddling in the economy—which hamper profit-seeking private enterprise, and causes periodic economic upheavals like the housing bubble, financial crisis, stock market crash, and Great Recession—than Wall Street.

Rather than frighten and belittle average people, it’d be much more productive to teach them how to invest and ignore the scare talk. My advice to average folks: Don’t let columns like this one scare you away from investing in the enormous wealth-building opportunities presented by America’s great public companies. Above all, never let some elitist convince you that you are a “little guy.” The minute you think of yourself as “little,” you’re sunk as an investor—and in life.


After spending most of the article scaring investors half to death, Reklaitis finally gets around to giving a little bit of advice. At the bottom of page 5, he writes:

The only strategy for the average investor is to stick to longer-term holding periods for investments. Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, says individual investors shouldn’t be trying to compete with high-frequency traders, adding that he thinks the “jury is still out” on how harmful or helpful so-called HFTs are, given that they add liquidity to the market.

And that’s about it, as Reklaitis slides back to telling us, on the sixth and last page, how “scarey” the market can be. For good measure, Reklaitis slithers in a slap at everybody’s favorite whipping boy—inequality:

Meanwhile, the distribution of stockholdings threatens to amplify concerns over growing inequality.

Stock ownership is highly skewed by wealth and income class, noted Edward Wolff, a finance professor at New York University, in a paper. The top 1% by wealth owned 35% of all stock held by households in 2010, while the top 20% held 91% of the total.

“The main conclusion is that the rise in the stock market certainly doesn’t benefit the average household,” Wolff writes. “The reason is that stock ownership, including 401(k) plans, is highly skewed,” with the average 401(k) amassing only $13,000 in equities in 2010.

Right. As if what the next guy’s investment portfolio looks like has any relevance to your investment portfolio—unless your a selfless envyer who measures his sense of self-worth with a yardstick labeled “others.” Reklaitis  concludes with:

It isn’t all doom and gloom. Investors have grown more disillusioned with active managers, particularly after the financial crisis, leading them to put a growing share of money into passive investments.

And more advisers are switching to fee-based business models and putting their clients in lower-cost funds rather than relying on trading commissions. That means lower costs for 401(k)s and mutual funds.

In the end, that all adds up to a “a direct transfer of wealth from the financial-services industry to the pockets of working Americans,” Bullard says, “and that is a great story.”

I love index funds. They dominate my investing strategy. But if everyone is coming around to index funds, that sounds like a classic sign of an impending change in trend. Perhaps actively managed funds may be the place to be for the next few years. We’ll see.

Related Reading:

In Defense of Special Interests - and the Constitution

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