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.
- 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.
- 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 real-time quotes are a commodity.
- 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.
- More social: Blogging and microblogging (StockTwits & Twitter) has opened up the world of idea generation to the masses. Anyone with a computer these days can put his or her ideas out there for the world to see. 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.
- 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 to 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.
- Brokers vs. RIAs: The 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.
- 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 application 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. Nor do they a hyper-personalize portfolio. An algorithmic service that manages, in a low-cost, diversified fashion, portfolios would allow investors to focus on 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 ETF 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 much technological advancement we have seen in investing our brains are still largely hardwired for an age of scarcity. That is why so many of our innate behavioral biases work against us when investing. That is why we consistently buy high and sell low, i.e. the behavior gap. That is why we often 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 that they systematically re-balance 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.