With the growth of low-cost trading platforms like Tiger and fractional shares, there are fewer barriers preventing individual investors with portfolios under $100,000 from investing in the same stocks as Wall Street.
However Wall Street still has some advantages:
1. Time + Economy of Scale
2. Objective / Compensation
3. Emotion
I'll break these down and then talk about how retail investors can combat this by buying and holding for the long-term.
Time / Economy of Scale
Picking individual stocks is hard and takes time to do your homework and to continue doing homework for the duration of the time you hold that stock. For Wall Street picking stocks is their full-time occupation, and they have access to major institutional research to inform their decisions.
In addition because each purchase they make is much larger (often larger than a retail investor's entire portfolio), this time investment is distributed over a much larger cost base than a fractional purchase of, for example, $100. They also benefit from lower trading fees as a result of their scale.
Objective / Compensation
As an individual investor, you are compensated by the capital growth and dividends on your stocks less taxes and any fees that you paid for trading. Fund managers are compensated by the fees that they charge to their investors. They will earn more fees if more money is invested, more money is likely to be invested if they are doing well in the short term to medium term. This actually creates a disincentive for Wall Street to focus on long term growth even if there are short term losses, and rather to execute more trades in order to realise short and medium term growth opportunities.
Emotion
To execute risky trades, you need to be unemotional and not follow hype. The research that you have done Should tell you about the potential of the company this may mean sticking it out through a fall in the market in order for that long-term growth potential to be realised later on. Likewise you shouldn't be so in love with stock that you're delusional and you hold onto it far past the point where it's value has crashed. It is sometimes difficult when investing our own money not to get emotional about things.
What does this mean?
In general most individual investors should be buying and holding for the long-term when they will use this money rather than chasing short-term gains. There is no get rich quick scheme where you make a fortune at the expense of Wall Street.
For me the majority of my investments are in long-term funds where I know that I will be able to hold them for 30+ years. I then have a small amount of money that I can afford to lose which I "gamble" on the stock market.
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