Why your stock broker will always be richer than you.

I’m reading Bull! by Maggie Mahar
It follows the boom and bust cycle of the stock market between 1982 and 2004. Here’s an interesting tidbit I thought I’d share with you.

Most stock brokers and mutual fund managers don’t get paid to take risks. They get paid to beat the index average. Which means that rather than risk their jobs over a stock that may or may not do well, they’d rather buy you the stocks that are in the index or have just been added to the index. This way the performance of your portfolio will mirror the index less of course any management fees or trading costs. Of course, when a stock is added to an. index, in their rush to add it to their funds, the managers create a huge demand for the stock bidding its price up, usually beyond its economic value. Do they care? Yes, they care about their jobs. Very few of them have the nerve to stay in cash, and sometimes they’re not allowed to keep cash on the sidelines. So its not like they have a choice. even if they feel the market is overvalued and due for a correction, they’re sometimes compelled to stay fully vested.

Also, over a 20 year period, most investors only make 6% return average per year. increase that to 40 years and you’re still under 9%. Far cry from the conventional wisdom that says you make 11.5% per year in the long run.

However, if you’re 1 in a billion like warren buffet, you could probably make 23.5% per year. But the average investor isn’t like Warren Buffet, who’s basically a market timer. He buys when prices are dirt cheap and the stock is out of favor and sells when everyone else is rushing to buy.

Be careful of whom you trust with your money!!

That being said I do have a commodity trading account that is broker managed. I don’t understand enough about commodity trading to feel secure about trading on my own. Commodity trading is about exploiting the inefficiencies in the pricing of the spreads on futures options which requires a lot of understanding and experience. So far my broker has made about 30% for me this year. Lets see how long he keeps it up. If you’re willing to experiment with some money you can afford to lose, shot me an email and I’ll hook you up with him.

Leave a Reply

Your email address will not be published.