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Given that hedge funds and trading firms employ scores of highly intelligent analysts, programmers, and managers to game the market, what shot does the average person have at successful investing in the stock market?

What's the best strategy for the average person who doesn't have time every day to follow in detail what's going on with specific companies, the market, etc? Would ETFs in growing industries be the way to go? Or is the best strategy to just stay out and go for more stable investments like bonds?

Any advice would be appreciated.

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    hedge funds and trading firms What they do you are never going to do, so forget about them. Yes you can profit from the market, just be careful and do your due diligence. Educate yourself about the market. There are some mantras from Warren Buffet available online, read them, they are good and will help you. – DumbCoder Nov 3 '13 at 7:13
  • most hedge funds do not make a positive return. – CQM Nov 3 '13 at 9:18
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    FWIW, bonds are traded by professionals, just like stocks are, and bond prices fluctuate based on a variety of factors, too. – Chris W. Rea Nov 3 '13 at 14:42
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    The key problem with average person is that most don't stay long enough. They invest when the market is high. Sell at first sign when its low and again invest when its high. I know quite a few friends who kept doing this and after few tries said market is not for them. Had they kept invested for long, they would have made good money. – Dheer Nov 3 '13 at 16:16
  • Watch programs like "Fast Money"; these money managers make good and bad guess , and are willing to talk about it. It also lists their investments. – blacksmith37 Jun 12 '18 at 16:03
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There's a huge difference between "can an anverage person make a profit on the stock market" and "can an average person get rich off the stock market".

It is certainly possible for an average person to profit, but of course you are unlikely to profit as much as the big Wall Street guys. An S&P 500 index fund, for instance, would be a pretty good way to profit. People with high-powered tools may make a lot of money picking individual stocks, and may even make some choices that help them when the market is down, but it's difficult to see how they could consistently make money over the long term without the S&P 500 also going up. The same applies, to varying extents, to various other index funds, ETFs, and mutual funds.

I agree with littleadv that there is no single "right" thing for everyone to do. My personal take is that index funds are a good bet, and I've seen a lot of people take that view on personal finance blogs, etc. (for whatever that's worth). One advantage of index funds that track major indexes (like the S&P 500) is that because they are and are perceived as macro-indicators of the overall economic situation, at least you're in the same boat as many other people. On one level, that means that if you lose money a lot of other investors are also losing money, and when large numbers of people start losing money, that makes governments take action, etc., to turn things around. On another level, the S&P 500 is a lot of big companies; if it goes down, some of those big companies are losing value, and they will use their big-company resources to gain value, and if they succeed, the index goes up again and you benefit.

In other words, index funds (and large mutual funds, ETFs, etc.) make investing less about what day-trading wonks focus on, which is trying to make a "hot choice" for a large gain. They make it more about hitching your wagon to an extremely large star that is powered by all the resources of extremely large companies, so that when those companies increase their value, you gain. The bigger the pool of people whose fortunes rise and fall with your own, the more you become part of an investment portfolio that is (I can't resist saying it) "too big to fail". That isn't to say that the S&P 500 can't lose value from time to time, but rather that if it does go down big and hard and stay there, you probably have bigger problems than losing money in the stock market (e.g., the US economy is collapsing and you should begin stockpiling bullets and canned food).

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    "But of course you are unlikely to profit as much as the big Wall Street guys": Citation needed. – Nate Eldredge Sep 17 '14 at 4:22
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    @NateEldredge The real difference there is that your average citizen is only investing (read -> betting with) their own money. "Big Wall Street Guys" invest other people's money. You can make a lot of profit when that's the case. Especially if you get paid whether the investments pay off or not. – Necoras Feb 8 '17 at 17:13
  • @Necoras that's not really true. Tons of Average Joes trade on margin. – quid Feb 8 '17 at 18:04
  • @quid that margin is still based on their own money. If you only have $1000 to invest, you will not be extended much margin with which to trade. That tons of average joes have access to margin doesn't change the leverage dynamics. – iheanyi Feb 8 '17 at 20:52
  • @iheanyi, but you can be extended margin, and trade on it, and that is someone else's money. Obviously pros make their money based on AUM fees. The fee arrangement is how pro traders are personally enriched by other people's money. The common 2 and 20 means the manager takes 2% of the money to accept your funds and 20% of any gains generated by your funds. They're making money because they're being paid via management fees to manage the money, not because they're "betting someone else's money" and by some magic are enriched by it. – quid Feb 8 '17 at 23:19
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Of course.

"Best" is a subjective term. However relying on the resources of the larger institutions by pooling with them will definitely reduce your own burden with regards to the research and keeping track.

So yes, investing in mutual funds and ETFs is a very sound strategy.

It would be better to diversify, and not to invest all your money in one fund, or in one industry/area.

That said, there are more than enough individuals who do their own research and stock picking and invest, with various degrees of success, in individual securities. Some also employe more advanced strategies such as leveraging, options, futures, margins, etc. These advance strategies come at a greater risk, but may bring a greater rewards as well.

So the answer to the question in the subject line is YES. For all the rest - there's no one right or wrong answer, it depends greatly on your abilities, time, risk tolerance, cash available to invest, etc etc.

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Given that hedge funds and trading firms employ scores of highly intelligent analysts, programmers, and managers to game the market, what shot does the average person have at successful investing in the stock market?

Good question and the existing answers provide valuable insight. I will add one major ingredient to successful investing: emotion. The analysts and experts that Goldman Sachs, Morgan Stanley or the best hedge funds employ may have some of the most advanced analytical skills in the world, but knowing and doing still greatly differ. Consider how many of these same companies and funds thought real estate was a great buy before the housing bubble. Why? FOMO (fear of missing out; what some people call greed).

One of my friends purchased Macy's and Las Vegas Sands in 2009 at around $5 for M and $2 for LVS. He never graduated high school, so we might (foolishly) refer to him as below average because he's not as educated as those individuals at Goldman Sachs, Morgan Stanley, etc. Today M sits around $40 a share and LVS at around $70.

Those returns in five years.

The difference? Emotion. He holds little attachment to money (lives on very little) and thus had the freedom to take a chance, which to him didn't feel like a chance. In a nutshell, his emotions were in the right place and he studied a little bit about investing (read two article) and took action. Most of the people who I know, which easily had quintuple his wealth and made significantly more than he did, didn't take a chance (even on an index fund) because of their fear of loss.

I mean everyone knows to buy low, right? But how many actually do? So knowing what to do is great; just be sure you have the courage to act on what you know.

  • Your example makes no sense where it comes to your "emotion" argument. You friend bought Macy's and Las Vegas Sands. In 2009. How is that different from any of the hedge funds who also made that same decision? So it would seem, emotion had nothing to do with it. Your friend couldn't have purchased credit default swaps, regardless of how emotionless he was. He was never in the position of pre-2008 hedge funds. Simply not comparable. – iheanyi Feb 9 '17 at 0:25
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I'd refer you to Is it true that 90% of investors lose their money?

The answer there is "no, not true," and much of the discussion applies to this question.

The stock market rises over time. Even after adjusting for inflation, a positive return. Those who try to beat the market, choosing individual stocks, on average, lag the market quite a bit. Even in a year of great returns, as is this year ('13 is up nearly 25% as measured by the S&P) there are stocks that are up, and stocks that are down. Simply look at a dozen stock funds and see the variety of returns. I don't even look anymore, because I'm sure that of 12, 2 or three will be ahead, 3-4 well behind, and the rest clustered near 25.

Still, if you wish to embark on individual stock purchases, I recommend starting when you can invest in 20 different stocks, spread over different industries, and be willing to commit time to follow them, so each year you might be selling 3-5 and replacing with stocks you prefer.

It's the ETF I recommend for most, along with a buy and hold strategy, buying in over time will show decent returns over the long run, and the ETF strategy will keep costs low.

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Below is a list of rules that will help you to decide what types of products you should be investing in:

  1. Invest in what you know.
  2. When in doubt, refer to Rule 1.
  • But don't buy a stock because you like their product : Good products and good stocks are not the same thing ( eg. GE). – blacksmith37 Jun 12 '18 at 16:06

protected by Chris W. Rea Jun 12 '18 at 16:01

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