The cops of Wall Street have heard the public lound and clear. The FBI, SEC, New York AG and CFTC have all expressed their desire to crack down on High Frequency Trading (HFT). To the extent HFT front-running was hurting individual investors the cops are going to make sure that doesn’t happen anymore.
The impending busts are going to emotionally satisfying but they aren’t going to get you any closer to having enough money for retirement. There are plenty of evildoers in the investment world but the biggest obstacle standing between you and financial independence is staring at you in the mirror.
In the attached video Lee Munson of Portfolio LLC ticks off three ways investors hurt themselvse more than the crooks every could.
1. Focus on the size of your nest egg not your monthly performance
Did you beat the S&P500 (^GSPC) in the first quarter? Trick question. The real answer is that it doesn’t matter. After you retire you won’t be able to pay your bills on outperformance. You need to build wealth. That means patiently contributing to a retirement fund not outperforming your neighbor.
“What matters is that when you retire you have enough income to pay yourself,” suggests Munson. Brag about your performance all you want but if you can’t spend it in a grocery store after you retire it doesn’t count as real money.
2. Trade less
For all the attention brought to the dangers of trading on Wall Street the fact is it’s never been easier or more efficient for individuals to daytrade. As Felix Salmon pointed out yesterday most transaction never get anywhere near a trading floor. Execution and commision are fine, the problem is trading itself.
Munson suggests carving out a small trading account for your speculative investments. Most investors have a little gambler in them. Rather than pretend otherwise carve out some speculative assets for your higher-risk speculations but keep your retirement funds sacrosanct.
3. Trade smart
Munson was once a high-flying NY trader. Now he’s seen the light, focusing on building long-term wealth for more passive investors. He’s found the switch to “boring” to be much more profitable than when speed trading.
“Get a plan and be very, very boring. If you want to make more money it’s not about chasing alpha or chasing down trades. It’s about systematically working a plan.”
People who absolutely must trade can carve out their speculative accounts as suggested above but they should expect to lose. That being the case Munson would rather take his cash and go to Vegas. “I prefer casinos where you get a free show and a buffet.”
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