As defined by Investopedia: A retail investor, also known as an individual investor, is a non-professional investor who buys and sells securities, mutual funds or exchange traded funds (ETFs) through traditional or online brokerage firms or savings accounts.
Behavioral biases are common triggers that can affect individual investors who manage their own money. Some individual investors will manage their own investments using one of the many tools or apps that can be easily downloaded to a smartphone. Schwab.com for example has a few apps that will allow you to monitor your holdings and even execute a trade. This type of unprecedented access to the markets has allowed the individual, or non-professional to easily buy and sell stocks with ease. This ease of access to trading stocks can be both good and bad depending on the direction of the market. Often the negative side effects of individual investing can lead to significant underperformance if trades are made at the wrong time.
Most people are affected by the 24 hour global, domestic and investment news cycles. News flow is real time using apps like Twitter, and the constant flow of news can often have negative ramifications for the average investor. As news flow comes in, it will affect emotions, and the behavior biases that we all have start to kick in and push people to action, or reaction. This push to action is often driven by emotional biases. Emotional actions, or reactions by investors can ultimately lead to underperformance.
To give another example of emotional and reactive responses, we can look at how people often use their Twitter account. The use of Tweets, or Twitter posts, is often the result of an impulsive response to a situation and often not a well thought out response. The use of a smart phone, the Internet, and the constant news cycle may similarly drive investors to impulsively respond to a news item without acting like a professional asset manager. A professional asset manager, like Robert Bender & Associates, will take many factors into consideration before making a buy/sell decision on a stock and will not impulsively react to a single news item or press release from a company. Our research is based on a wide array of data points, and rarely does a single data point drive our decision in a stock. Robert Bender & Associates will use a combination of fundamental, quantitative, and qualitative characteristics of a stock to form a top down and bottom up investment opinion. The bottom up analysis of a stock is merged with a top down analysis, or a broad market analysis, which helps us make a more informed and rational decision about an investment holding.
The joke on Wall Street goes that if the bus driver is giving you stock tips, or the construction worker is telling you an options strategy, there may be some irrational exuberance in the market. Let’s examine this. As the market cycle begins with a move from a low, a recession, or a bear market, there will be few people who want to jump into new positions in stocks. As the market cycle matures, more and more people will see that stocks are performing well and they’ll want to enter the market. As the market nears a top, literally everybody will become an expert at the stock market and they’ll be making recommendations about individual companies as well as trading strategies. While some recommendations are viable, often the analysis is lacking depth when compared to what a professional would apply to the situation.
The cost of making the wrong decision at the wrong time can be costly for your portfolio. Missing the 10 best days of the market over a 20 year period can have dramatic ramifications for a portfolio. As reported by BusinessInsider.com, the difference between staying fully invested and missing the best 10 trading days over a 20 year period can cut investment returns in half. The decision of when to put money to work, or pull money out of the market can have a dramatic effect on overall wealth. The timing of investment decisions is difficult for investment professionals, and often impossible for the average individual investor. We do not try to time the market, instead, the portfolio managers at Robert Bender & Associates invest using a data driven process that aims to limit emotional trading responses and aims to limit individual behavioral biases. Our goal is to implement a structured investment process to achieve above average returns for our clients while adhering to client portfolio objectives and constraints.
A professional investor is typically able to see beyond the short term market movements, and at Robert Bender & Associates we implement a top down and bottom up analysis to make more informed decisions. Having a professional invest assets can also help to ensure that the individual investor doesn’t let their emotions take over and a professional often avoids costly impulsive trading mistakes. When an investor lets their emotions make the trading decisions, they risk making the wrong decision. We encourage you to contact Robert Bender & Associates to inquire about our professional money management services.