{"id":1152,"date":"2012-04-13T11:59:20","date_gmt":"2012-04-13T18:59:20","guid":{"rendered":"http:\/\/www.marketriders.com\/blog\/?p=1152"},"modified":"2016-12-21T07:34:26","modified_gmt":"2016-12-21T15:34:26","slug":"etf-traders-cant-win-a-losers-game","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/etf-traders-cant-win-a-losers-game\/","title":{"rendered":"ETF Traders Can’t Win A Loser’s Game"},"content":{"rendered":"

In their 1978 song, \u201cWhat a Fool Believes,\u201d the Doobie Brothers spin a tale of a man who is self-deceived, trusting a lie of his own making. Somehow, this poor sap has convinced himself that he is a Casanova, the apple of some woman\u2019s eye, when in fact he isn\u2019t even a blip on her radar.<\/p>\n

This fictitious character\u2019s predicament is not much different from what many stock traders face. In love with the Wall Street fantasy of trouncing the markets through laser-like stock selection, such investors prefer to see themselves as a type of Warren Buffett \u2014 processing data with superhuman accuracy to distill the investment insight of the day.<\/p>\n

Such investors have convinced themselves that their fantasy is in fact reality \u2014 that they can overcome a million I.Q. points, a throng of Ivy League MBAs, and software systems engineered by rocket scientists, and pick a needle of a winner out of a massive equity haystack.<\/p>\n

Potholes on Wall Street<\/h3>\n

In his insightful \u201cA Random Walk Down Wall Street,\u201d Princeton University professor Burton Malkiel effectively argues for what economists call the efficient market hypothesis \u2014 that the price of equities reflect all the publicly traded information and thus are efficiently priced. In other words, there are so many intelligent and informed investors staring at both sides of the buy\/sell ledger that it becomes a crap shoot to try to pick a stock\u2019s direction based on your reading of the tea leaves.<\/p>\n

Armed with the same information, struggling against market pros is daunting enough. However, traders aren\u2019t armed with the same information. They have brought a knife to a gun battle.<\/p>\n

The SEC is hotly pursing cases of rapid-fire trading, in which complex computer systems allow institutional groups to jump ahead of the average guy in an exchange\u2019s \u201corder book.\u201d<\/p>\n

Capable of anticipating that your trade is about to hit the system, these geniuses have found a way to front-run your activity, harvest a profit and get out in the blink of an eye. Such computerized trading now represents almost one-third of all daily exchange volume. To add injury to abuse, the SEC has discovered that these same rats earn rebates on their transactions from the exchanges even as regular investors pay fees to complete their trades.<\/p>\n

Don\u2019t believe that high frequency trading is Wall Street\u2019s only advantage. In an effort to undo the efficient market hypothesis, Wall Street pros are always angling for bits of information the average guy can\u2019t obtain. Competing against these traders is a fool\u2019s errand. As the Las Vegas adage goes, \u201cLook around the poker table; if you can\u2019t spot the sucker, it\u2019s you.\u201d<\/p>\n

So what is an investor to do? Quality ETFs provide an answer. Low in cost, highly diversified and tax efficient, these vehicles give the average investor more than a fighting chance to emerge from the fray a winner. With ETFs, investors own a bit of everything in proportion to their individual needs \u2014 in the next year, some of their holdings will rise and others will fall, but over time they will reap the rewards of participating in the free market\u2019s productivity.<\/p>\n

Smart investors own stocks from the U.S., through a fund such as Vanguard Total Stock Market ETF VTI -0.81%<\/a> and around the world through funds such as Vanguard MSCI European ETF VGK -2.29%<\/a> and Vanguard MSCI Pacific ETF VPL -0.85%<\/a> .<\/p>\n

In addition, they own bonds through Vanguard Total Bond Market ETF BND +0.19%<\/a> , and get commodities exposure through SPDR Gold Shares GLD -1.19%<\/a> and iShares S&P Global Energy IXC -1.24%<\/a> , and real estate exposure in SPDR Dow Jones REITRWR -0.07%<\/a> .<\/p>\n

These investors have the discipline to trim what is going up and buy what is going down. Guided by a plan as opposed to intuition, they bought stocks when the S&P 500 Index SPX -0.77%<\/a> crashed in 2009 and trimmed their bond holdings. Today, they\u2019re adding to their bonds while trimming fast-rising stocks.<\/p>\n

What does a fool believe? For the trader, it\u2019s a fantasy of beating the pros. For those of us who prefer reality, using ETFs for low-cost indexing, asset allocation, and disciplined rebalancing is the game to play.<\/p>\n","protected":false},"excerpt":{"rendered":"

In their 1978 song, \u201cWhat a Fool Believes,\u201d the Doobie Brothers spin a tale of a man who is self-deceived, trusting a lie of his own making. Somehow, this poor … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":1394,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[3],"tags":[],"yoast_head":"\nETF traders can't win a loser's game<\/title>\n<meta name=\"description\" content=\"How Wall Street Works: : Try MarketRiders investment software Free for 30 days & get a Free Investment eBook at MarketRiders.com. 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