Take your ball and go home

In the last decade market volatility has set investors on edge.  Daily swings of two to three percent in major markets suddenly seem commonplace.  Their frequency makes them only more exhausting.

Investors are leery of Wall Street, overwhelmed by news of the next Ponzi scheme, private investments falling apart, and unsure what to think about high-frequency traders.  The conclusion most investors have reached is that Wall Street is simply a band of marauding highway robbers, happily taking from unsuspecting mom and pop investors.

The fact is that everyone working on the Street (traders, analysts, fund managers, brokers, investment bankers) is looking for an edge.  High frequency traders buy up office space next to the exchange so their trade can be milliseconds in front of yours. Analysts pour booze into corporate insiders hoping for a tip.  Fund managers fight like scavengers for tiny scraps of “alpha.”  Investment bankers convince their analysts to give their corporate client a “Buy” rating for a shot at the next public offering, often at the expense of the retail client trusting that analyst’s report.

It is no surprise that many investors have capitulated and are now sitting in cash or bonds. They are convinced that investing in stocks is a scam and they are being taken for a ride.

The fact is that playing Wall Street’s game is a losing proposition, as the odds are deeply stacked against the investor.  Active investing, be it trading, stock picking or looking for the best mutual funds, is a game of craps and the Street is the house. Play long enough and the house wins.

Of course, there is another way.  Investors can reap the long-term rewards of stock ownership without playing Wall Street’s game.  Cut out the traders, the analysts, fund managers, high frequency traders, the technicians and buy the market and hold it indefinitely.  Don’t trade with the big boys, don’t get caught up in the next IPO hype, don’t wonder if the iPhone 6 is going to sell 10 million units at its release.

Investors who buy the market portfolio through an index fund will limit expenses and taxes and participate in market returns while avoiding many unnecessary intermediation costs. You can remove yourself from the circus of Wall Street.  Who cares if high frequency traders are fighting for prime real estate? You aren’t silly enough to trade regularly and be taken advantage of by them, and your index funds know better too.  Who cares if a company “bought” a positive rating on their stock with the promise of future business?  You aren’t trying to sort through a mess of individual stocks for your portfolio.

Index investing isn’t perfect.  There will still be corporate insiders and Washington politicians taking advantage of non-public information for their own gain. There will still be hedge funds trying to manipulate stocks to their benefit. But the best route to your personal success as an investor is not to capitulate, but to insulate yourself as much as possible by not playing Wall Street’s games and focus on your own long-term goals.

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