The conventional advice retail investors received from the financial advisors over the last several decades was to "buy and hold" good-quality stocks, bonds and mutual funds. This strategy, we were told, would finance our kids' college educations and our retirement. Now, it seems that "buy and hold" is just for suckers.
Such investors are sitting ducks for the new breed of "high frequency" traders, the nefarious "dark pools" and Wall Street firms who use retail investors as dumping grounds for their dubious products and shares. A recent blog by CNBC producer John Melloy underscores how out of sync buy and hold investors are with the market. Indeed, the amount of data showing the disadvantage traditional, long-term investors currently face is staggering.
As Mr. Melloy points out: "The average holding period for the S&P 500 SPDR (NYSEARCA:SPY), the ETF which tracks the benchmark for U.S. stocks, is less than five days, according to worrying statistics in analyst Alan Newman's latest Crosscurrents newsletter."
"'Given recent average volume, the SPY trades its entire capitalization and then some each and every week. Does anyone really wish to argue where valuation might enter the picture in this scenario? Value does not matter in the slightest,'" according to the analyst.
After three bear markets in the past ten years, individual investors no longer have the stomach for stocks. This means that the market is left to high-frequency traders whose moves in and out of such funds as the SPY thwart the goals of long-term investors.
"The pros and high frequency traders rule the world," notes Brian Stutland, an industry analyst Mr. Melloy cites in his post. "Plus, if the average person ever comes back, then they won't have time to play all day long, back and forth in the market. So, maybe buy and hold really is dead."
Many retail investors already feel like they can't trust the market and are sitting on cash. But with interest rates at zero, many mom and pop investors are desperate to see their cash grow.
What's a buy and hold investor to do? Are financial advisors with industry leaders such as Merrill Lynch and Morgan Stanley devising effective strategies to protect their clients from the risk of the rapidly trading players now populating the Street? Are the top firms managing that risk while keeping in mind the need to protect the capital and generate some returns for the investing public?
We suspect this battle between the mom and pop investor and the high frequency trader is in its infancy. How will the institutions of Wall Street respond? Will they side with the little guy, or the investment professional? As we have noted in the past, it's usually the little guy who loses out in such struggles.
Disclosure: Zamansky & Associates are securities attorneys representing investors in federal and state litigation and arbitration against financial institutions, including Merrill Lynch, Bank of America and Morgan Stanley.