One Way To Avoid HFT

Posted by Jeff Carter
on August 15th, 2012

How does the individual investor interact with high frequency traders? Avoid them. For people trying to earn a living by trading, it’s impossible to avoid them. But, to the average Joe, you can easily avoid them. Just use the principles of the efficient market hypothesis and don’t put your money in a position where it will be actively traded.

If you take a little bit every month and put it away in a 401(k) retirement fund that is no load and replicates a broad index, like the S&P 500, you can rest easy at night. You will do better in the stock market over time than you will anywhere else.

Should individual investors have reason to abandon the stock market because of the increased volatility rapid-fire trading can cause? Not at all. Investors saving for retirement have no reason to fear day-to-day or week-to-week volatility. The correct response is not to “do something” but rather to “just stand there.” Evidence continues to accumulate that the long-term investor who simply buys and holds low-cost broad-based index funds and (indexed) ETFs does not achieve mediocre returns but well-above-average returns. During 2011, index-fund investors outperformed over 80% of actively managed equity funds. The same results have continued in the first half of 2012.

The average Joe at home is starting to lose confidence in the market. The bank bail outs, and all the government machination combined with poor regulatory incentives have caused a lot of unnecessary turmoil in the inner workings of the stock market. Average Joe has pulled his money out.

But, the reality is Average Joe ought to be shoving his retirement money in with both hands. Twenty years from now, Average Joe will look back and see they did a lot better having it in the market than under their mattress or in bonds.

For a counterpoint, click this link.

thanks for the link Abnormal Returns

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.