Four Ways Small Investors Have it Better Than "Wall Street" Wizards

Some small investors are self conscious and nervous - like scared lil minnows darting around the pond trying to compete with the big bass (Wazoos, I call ‘em). If this is you - stop fretting! Small fish (investors) have four advantages over the Wall Street sharks that help them maximize investment performance in the long run, assuming you play your cards right.

If you invest in index funds – and enjoy those low annual operating expenses – numerous studies indicate that you’ll outperform most of the professional investors in the stock market. Hard to believe? It’s true!

The Wazoos are good at what they do, but those boys trade a lot and spawn a plethora of associated costs while generating mostly short-term capital gains, which are taxable at personal versus capital gains rates. This is the primary reason why small investors who invest in index funds outperform most Wazoos.

Unless you choose to, you don’t have to compare your portfolio’s performance to the short-term benchmarks Wazoos love to measure themselves against. As a small investor, you can …and should…choose to ignore such benchmarks. I call it “daring to be average.” In investing, average is a good thing. Worry about achieving YOUR financial goals, not someone else’s. Last quarter is history, so ignore it. Too much concern about the past often compels folks to make poor decisions about the future.

Constantly referring to your financial statements or someone else’s long-term predictions matters little in the great scheme of things. A now-departed, well-known informercial guy, Ron Popeil, coined the phrase, “Set it and forget it” about a product he made popular. With regard to your investment portfolio, this can be sound advice to follow.

Avoid excessively stewing over your monthly financial statement performances, and ignore all of those macro predictions by the so-called experts. When you ask for a dozen opinions, you’ll likely receive 12 different sets of advice. Once you’ve developed a well-diversified, quality portfolio approach that best fits your philosophy about investing, just set it and forget it. Relax and enjoy the rest of your life’s activities.

In short, exercise patience with your investment process.

Based on what I’ve read over the years, college endowments and big foundations that manage millions or billions of dollars seem to be consumed by their over- or under-performance relative to some statistical benchmark or the performances of their peers, even though they are organized to last in perpetuity - on an endless time horizon if you will. Why this crazy obsession with quarterly or annual performance numbers? Their performance time horizons should be measured in decades.

The longer your time horizon, the higher your probability of success in the stock market. Don’t play the Wazoos’ short game. If you do, you’re very likely to come up “short” over the long-term (unless you get lucky). Playing the long game is the little guy’s advantage in the marketplace.