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I feel like Will Ferrell in The Wedding Crashers uttering his signature line, "What is she doing back there?" The only difference is that he is wondering when his meat loaf is coming while I am pondering when retail investors are going to wake up and adopt a realistic view of their investment abilities.

I'm sure Will's ma brought that meat loaf a hell of a lot faster than most retail investors will say, "You know what, I'm not as smart as I think I am. Smart investing is pretty complicated and is a serious business." As IA readers know, idiot retail investment ideas and approaches are a pet peeve of mine and drive me absolutely bonkers, and my ire was raised to a fever pitch when reading a thoroughly disgusting article in Tuesday's Wall Street Journal titled Small Investors, Too, Get Nailed by Arcane Trades. I have only one simple question upon hearing this news: WHY???

So glad you asked. Here are my theories (in no particular order):

1. Hubris
2. Greed
3. Stupidity
4. Fear
5. Lack of knowledge
6. Because most humans are wired to make dumb investment decisions

When I hear of retail investors engaging in multi-legged option strategies, trading foreign exchange and commodities and shorting stocks, I cringe. How many lumps are people going to require to wake up and grow a little humility? I get it - the psychological phenomenon, that is - but I DON'T GET IT. There have been countless stories documenting the sheer idiocy of so many retail investors, being in way over their head and getting killed. So why do people continue making the same mistakes? For the exact opposite reason of why Warren Buffett really is a once-in-a-generation type investor: discipline.

Discipline, especially when it goes against one's native instincts, is hard. When your friend brags about a particular stock or strategy on the golf course, you are jealous, right? And when you hear stories of people making tons in _____ (choose your era - tech stocks, commodities, currencies, gold, etc.), regardless of a lack of documentation (self-reporting is notoriously poor as people tend to remember wins and forget losses), you want in, right? It is very hard to be the tortoise when you are seemingly surrounded by hares. But you know what, you can try your hand a bit if you adhere to a few simple guidelines:

1. Set an asset allocation mix that makes sense for your age, stage, family circumstance, etc. If you can't do this with confidence get some help;
2. Establish the majority of your allocation using low-cost, liquid instruments like index funds and ETFs;
3. Figure out if you want to try and dicker with investing at all, and if the answer is yes;
4. Limit your "play money" to 5-10% of your total portfolio.

By all means have some fun. Do some research. Collaborate with others. Try and generate some real alpha. But don't, DON'T have this be the core of your investment strategy. Please. Don't. Do. It. If you follow my advice you can get the high of investing without running the risk of an overdose. Because an overdose can kill you.

UPDATE:

This piece was designed to highlight the risks associated with being a retail investor and wading into complex territory, and to make a recommendation for keeping the core of one's strategy brutually simple (and cost-efficient) while leaving some room to stretch for outperformance.

A common thread running through the more critical comments I received were of the nature "Well, how can you write this when Institutional investors (read: hedge funds) have been doing incredibly stupid things and losing boatloads of money? Isn't it arrogant of you to say that retail has problems when institutions have plenty of problems of their own?" Answer: yes I can write this and and no it's not arrogant - they are two different issues entirely. But since I clearly left some ambiguity on the table, let me clarify and be more precise about a few things:

1. When I say "retail investor," I mean an individual for whom investing is not a full-time vocation; it is a necessity and/or a hobby;

2. Institutional investors are those for whom investing is a full-time vocation, enabling them to spend more time doing research then even the most talented of retail investors. Furthermore, most Institutional investors make a goodly living off their vocation;

3. When I discuss the frailties of humans as investors, they apply to both retail and Institutional investors; it is only that a small subset of investors. be they retail or Institutional, have the ability to overcome these frailties; and

4. When I talk about discipline, the challenges of remaining consistent and sound in one's strategy applies equally to both retail and Institutional investors.

Ergo, carrying a card that reads "Institutional Investor" does not somehow imbue you with skills and abilities that automatically make you successful, just as being labeled "retail" does not, by definition, correspond to the word "idiot." My belief is that almost all investors, be they retail or Institutional by stripe, are not good. Those who can generate true, sustained, statistically-significant outperformance over long periods of time are rare. No, more than rare.

But I care less about the failures of Institutional investors as people because they, quite frankly, make a lot of money as a group, while retail investors span the economic strata. This is why I choose to write about retail and my wish for them, as a group, to think smart, be humble, and take a rational and serious (read: "This is not fun - this is business") approach to investing. If this is arrogant, so be it. Excuse me. But I think someone without a vested interest needs to write this stuff because it is a perspective too often lost amidst the hype.

Source: Memo To Retail Investors: Smart Investing Is A Serious Business