Never Been Better Time to Be an Individual Investor

Tadas Viskanta Abnormal Returns February 15, 2012

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 â??lost decade for stocks.â?? 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 â??war on saversâ? 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 â??cheaper or easier.â? 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. Letâ??s take these points one by one.

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.

In the New York Times this past weekend there was an article talking about the many changes we are seeing through the analysis of â??big data.â? 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 donâ??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 todayâ??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.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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Never Been Better Time to Be an Individual Investor

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