But looking beyond active trading, there is an important development that has gained traction in the investment world. It loosely falls under the umbrella of alternative investing.
Why focus on investing? The first reason was nicely captured in this article by Morgan Housel on why we're awful at assessing risk. There are real costs associated with fees, overtrading, and undersaving. I've met many active traders looking to make a living from a small capital base. If they trade with a $5.00 retail commission and place one trade in the morning, one at midday, and one in the afternoon each day--hardly wild-eyed daytrading--they will have accumulated about $7500 in brokerage expenses over the course of a year. On a $50,000 trading count that means that the active trader is down a guaranteed 15% over the year--not including other expenses such as equipment, software, data fees, etc. With the house stacked that way, Vegas starts to look attractive.
The larger reason for the investment focus is that baby boomers have found that they need to take control of their finances in a zero interest rate world. These self-directed investors are smart enough to know that they need diversification in their portfolios. They don't need to be whiz-bang daytraders--they need to be competent portfolio managers.
But how can the average self-directed investor become a portfolio manager and hope to compete with experienced hedge fund and asset management pros? One answer has become alternative mutual funds, which invest in strategies that the pros use. Here's an excellent article passed along by the Simple Alternatives blog; it explains the the difference between hedged mutual funds and hedge funds. It's a very important distinction for individual investors.
Imagine informed investors assembling portfolios of hedged mutual funds across a variety of asset classes and strategies. In such a world, investors would look less like traders and more like funds of funds.
That future is already coming. Take a look at one of my favorite sites, Abnormal Returns. Every week editor Tadas identifies the links that have received the greatest number of clicks. Here is the list for this past week and the week before. What I find interesting in the lists is that so many of the links are pertinent to individual investing, not trading. Those who need to manage their capital are hungering for information to help them become better at balancing the needs for return of capital and return on capital.
When you hear individual investors debating the risk-adjusted returns of their investment alternatives and not the short-term path of the stock market, you'll know that the revolution is upon us.
Further Reading: Being a Professional Trader
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