Stop Trading! – Why You Should Give Your Money to a Professional Investor

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It has never been easier to set up a retail trading account. In the age of high volumes, electronic trading and ETFs, the number of retail trading accounts has grown to staggering levels. The number retail investors now probably exceeds the number of professional investors by many orders of magnitude. And yet, are retail investors really capable of managing their own money?

The Numbers

Let’s review some cold hard facts about the performance of retail investors in the markets.

  1. Less than 10% of retail traders and investors are profitable
  2. Of those profitable traders, only a handful are spectacularly profitable
  3. When surveyed, only 1% of retail traders understood the meaning of the financial terms option, delta, gamma, theta or modern portfolio theory

Volatility = opportunity = risk

Today’s markets are more volatile than ever before. For savvy professional investors, this translates into opportunity. But for those who don’t know how to manage risk, trading in the markets is a challenge and in many cases a gamble. For the risk averse, there is no need to trust professional traders. Low risk equity funds use the science of modern portfolio theory to eliminate risk in volatile markets, and sturdy money market funds put together mathematically optimized bond portfolios organized into diversified risk-return tranches.

Should we introduce stricter regulations for retail traders?

It’s a tragedy that so many retail investors are losing money when professional investors are producing strong and reliable returns with tested investment strategies. One solution is to introduce stricter regulations on retail trading accounts that limit the amount of risk that the trader can take. In addition, a windfall tax on large profits would discourage traders from taking excessive risks and would funnel more capital into safer investment funds.

Conclusion

Investors have the right to do whatever they want with their own money, but only within the bounds of their societal responsibility. It is absolutely irresponsible to risk your capital in the markets without a solid economic education and at least 10 years of experience in the investment industry. As more and more average Americans become retail traders, it is now up to the government to regulate this activity and ensure that people invest their money responsibly.

1 COMMENT

  1. Managing money is too complicated to leave to “personal responsibility” as the conservatives like to put it. You might lose money. We need a government agency to regulate how people invest their money, because people might make poor investment choices. People should have to get permission from wise government bureacrats before they are allowed to move their funds from one investment to another.

  2. I work in the Accounting & Finance department at a prestigious Business School and could not agree with you more. Regulation is sorely needed to ensure that the unsophisticated retail investor doesn’t injure his or herself by “skiing off piste” so to speak. The skills required to understand modern finance are gained, as you so rightly point out, over a multi-decadal period of rigorous academic study and sobering real-world experience. These people are paid extremely well for a reason!

    Regulation is also required in regard to certain shady “Financial Advice” websites, which bamboozle gullible investors with meaningless and indecipherable charts whilst at the same time directing them into wholly unsuitable and socially irresponsible investments such as Silver and Gold.

    CS

  3. Actually, I would laugh if any such regulations were created (even though this is what the FEDGOV is wont to do), because they would mess up the carefully concocted scheme by banks to steal small investors’ money via the market. In fact, for the most part the market has merely become a transmission mechanism for transfer of money from individual investors to large professional investment institutions. If the amount of risk that individual investors could take within the market were to be limited, or if certain investors were to be kicked out of the market by law, or if all the individual investors were to be alienated, then the big banks and professional investors would have nothing left to do but steal from one another.

  4. Another brilliant piece MDB. Letting the average person trade is irresponsible. I can’t believe we still don’t have any laws to protect the average person from believing that they have a fair chance against seasoned professionals, state of the art algos, and informed insiders.

    I propose a national 401K plan (lets call it Obama401K) where each person can get a fair shot at getting returns from the market. If people want to “opt out” from such a plan, they must demonstrate that they have the correct credentials and certifications to make intelligent financial decisions. If we require people to have licenses to drive cars, then we should require licenses to invest in the market also!

  5. MDB – I think you’re off your rocker

    Allowing the common man to trade for himself, very easily, is a healthy thing. How can you not be behind a man being economically empowered to spend his money as he sees fit?

    Those other “professional traders” that we’ve given our money to only seem to lose it and then make excuses when we confront them. I, for one, feel that it is good to have my own trading account with MY OWN finger on the buy / sell button.

  6. Close but no cigar, MDB. It has been scientifically proven that market indexes beat the return on “professionally managed” funds. The expenses are lower, and risk is spread further, so you don’t lose money like you can if you invest in a fund with a manager who didn’t get good grades at business school.

    If they want to make it easier for ordinary people to share the wealth, what the government should do is organize a way to take your investment and give it to the whole market — not just the Dow Jones or Fortune 500, but every business out there. Think how efficient it would be if your money went directly into the whole economy, plus the risk would be super low because the investment would be spread so widely. I’m thinking just the US economy at first, though once the system is up and running we could maybe expand the investments to allies with stable, modern economies like Japan or France.

    In the meantime, I’m working my way through buying a share of each company on the NYSEG. When I finish that, I’ll do the NASDAQ, then probably start over again at the beginning.

    Ex-Oligarch
    ps. I might cheat a little and buy some Apple first — you can’t lose with that one.

  7. The only type of liberty is that which restricts human action.

    I agree! Only defunct bureaucrats have the skillset and analytical ability to decide how retail ought to allocate their meager savings.

    Bravo!

  8. but…but… I can lose my money just as fast (or faster) than the pro’s do! That’s called out-performance bitches!!1

    Plus I save on MER’s too – Booyah!