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It is common knowledge that if you are the "average investor" and are looking to invest money in the long term, you should invest into low-cost ETFs or mutual funds and hope to track the market, not beat it (as that is more sustainable in the long run). But a lot of people are not the "average investor", and might not even know it. My main question would be what situations would ETFs/mutual fund not be the best options?

A secondary one would be who is the "average investor"? Would it be a measure of how much money they have to invest or someone with not enough time to research individual stocks so effectively value invest?

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  • Who is the "average investor"? He's the guy who achieves "average" returns. Apr 22, 2020 at 11:40
  • That's an incorrect deduction, Bob. Although the alliteration sounds convincing, there is no logical connection; the average eater could have the best health.
    – Aganju
    Apr 22, 2020 at 20:55

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Investing in low-cost index funds is good advice for many people, because the people at which this advice is targetted:

  • are interested in maximizing returns but don't want excessive risk
  • have a multi-decade investment horizon
  • cannot get sufficient diversification without funds
  • don't want to make investing into a full time job, just buy & hold

For some people, this profile might not apply. For example:

  • low-costs index funds are inappropriate due to ESG criteria of the investor
  • higher or lower risk tolerance, wanting to make sector bets
  • short investment horizons of under ten years
  • means to diversify and hedge risks without having to pay fees to a fund

But a very important reason not to invest via index funds is because you have better uses for that money.

  • Lending money, or investing in non-equity assets, has a different risk vs returns profile.
  • Building your own company can have far higher returns, but you also have massive risk.
  • Investing in non-publicly-traded companies (startups, SMEs) can have far higher returns, but has enormous risk.

But these things require a really good understanding of the subject matter – you're not investing money, you're using money to leverage your knowledge in order to exploit market inefficiencies. E.g. when lending money, you need to be able to estimate credit risk better than other lenders (this is why P2P lending is a really bad idea). When investing in startups, you need connections to know about the opportunity before other investors do – and you need to understand the startup's business really well. When doing day trading, you need to have better risk management models than competitors, or you'll get ripped off. And you can't afford making such bets unless you can make lots of bets. You don't have to be correct each time, your bets just need a positive expected value.

This combination of knowledge and capital can be quite lucrative, but it's not in reach for the average investor. Most people make more money through employment. But arguably, this situation is just an artefact of a capitalist society – ideally, capital would not be a barrier to entry. E.g. a stronger social safety net makes individual risk-taking less risky, potentially shifting the average investor advice from “buy index funds” to “try building that really good business idea you have”.

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