6 advantages retail investors have against the professionals

How dare the finance industry call themselves the 'smart money', implying that we're 'dumb'. Here's how the little guys can fight back

Young boy wearing suit and glasses counts his money using a calculator.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The term "smart money" is often bandied about without self-consciousness in the finance profession. But Marcus Today director Marcus Padley pointed out the concept is horribly condescending to retail investors.

"It is demeaning to individual investors and used by the finance industry to imply they are smart and the rest of you are by implication 'dumb'," he wrote on his website last week.

"But a lot of supposedly smart professionals do some very dumb things, and a lot of non-professional investors do some very clever things."

Padley argued perhaps a more accurate term for institutional investments could be "big money".

He did admit the professionals do have some advantages, such as access to initial public offerings and share issues.

But there are many privileges retail investors have that institutional investors can only dream of.

How? How can the 'little guy' have an advantage over Goliath?

Here are 6 that Padley mentioned:

You don't have to answer to a client

This is the most obvious difference between retail and professional investors. But how is this advantageous for the little guy?

"You don't have a mandate controlling what you do. You can do what you want. You can change what you do at any time without reason or explanation. You don't have to publish an investment philosophy and strategy and stick to it," said Padley.

"You don't have competitors screwing with your state of mind. You can walk away without anyone knowing or minding. You can take the day off. You can take a month off. You can take a year off. You can stop managing funds forever without one email asking you why."

You're not constantly competing against a benchmark

Funds and fund managers are compared to their benchmark index each month, quarter and year. This means they can't necessarily take a long-term view of their shares.

The constant benchmarking incentivises short-term moves.

The retail investor doesn't have to worry about any of that.

"You are not criticised. Reputation doesn't matter. You don't lose your job if you underperform… No one is comparing you to a compounding benchmark with no costs."

If you have some periods of underperformance, you can just ride it out. If you get it wrong you don't lose investors," said Padley.

Liquidity doesn't matter

Retail investors very rarely have to worry about whether buying or selling an ASX share will change the market.

"Liquidity issues don't matter," said Padley.

"Moving prices when you decide to buy or sell is a big issue for fund managers. When [retail investors] buy and sell you don't affect the share price in a counterproductive way. You get better and quicker execution."

Investment costs are minuscule compared to a professional

Ever wondered why fund managers take such a chunky percentage fee from their clients?

Yes, they are making a decent salary for themselves, but they also have many overheads that retail investors never need to worry about.

"You don't have any compliance issues burning time and money. You don't have to publish, let alone comply, with your financial services guide," said Padley.

"You don't have to pay for a compliance manager. You don't have the threat of ASIC turning up at your door with a 'please explain'. You don't need an Australian Financial Services Licence (AFSL). You don't have the cost of an AFSL. You don't have the administration of an AFSL."

Instant diversification is not a failure

The diversification advantages of listed investment companies (LICs) and exchange-traded funds (ETFs) are a massive advantage for the average punter.

They are options that institutional investors would not dare touch.

"If you buy an ETF or a LIC and it's not seen as a 'failure'," Padley said. "It is for a fund manager."

Freedom, sweet freedom

Agility and liberty are some of the best weapons for the retail investor versus the professionals.

And these days, with all the tools available online, punters have similar resources to the pros anyway, according to Padley.

"You don't have to justify your decisions to a committee. You can react to events almost instantly," he said.

"You don't get emails from your investors distracting you from the job in hand… You can use mechanisms like stop losses if you want."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Investing Strategies

A mature-aged couple high-five each other as they celebrate a financial win and early retirement
Dividend Investing

5 top ASX dividend shares to buy right now

Analysts think income investors should be loading up on these shares.

Read more »

Two adults and a child look happy as they walk through airport with child sitting on suitcase.
Dividend Investing

Will Qantas shares pay a dividend in 2024?

Will the dividends return this year? Let's find out.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Dividend Investing

2 market-leading ASX dividend stocks to buy in April

Analysts have put buy ratings on these market-leaders.

Read more »

Father in the ocean with his daughters, symbolising passive income.
Dividend Investing

I'd spend $8k on these ASX 200 shares today to target a $6,102 annual passive income

I believe these ASX 200 shares will continue rewarding passive income investors for years to come.

Read more »

Man holding Australian dollar notes, symbolising dividends.
ETFs

Want the latest dividend from the Vanguard Australia Shares ETF (VAS)? Here's what you have to do

If you want to bag the latest VAS dividend, here's what you need to do.

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Dividend Investing

Investing for passive income? Keep any eye out for that boosted Telstra dividend today!

If you own Telstra shares, keep an eye out for that juicy dividend payout today.

Read more »

Couple at an airport waiting for their flight.
Cheap Shares

Is Qantas a bargain ASX 200 stock today?

Analysts at Goldman Sachs think the Flying Kangaroo could be dirt cheap.

Read more »

Person holding a blue chip.
Blue Chip Shares

2 ASX blue-chip shares I'd buy with $3,000 right now

These are large businesses with compelling futures.

Read more »