Become a personal finance expert
Subscribe to our thrice-weekly personal finance newsletter that makes you smarter about your money.
Contextualizing the finance news you need to know.
Emotion is often seen as the differentiating factor between institutional and retail investors. Well, that and size, since institutional investors make up more than 85% of trading activity on the NYSE.
For the uninitiated, an institutional investor is a company or organization that invests on behalf of someone. Think mutual fund managers, banks, hedge funds, insurance companies, and dudes with either a monocle or a Patagonia vest. A retail investor puts their own money in the market to meet their personal goals. You know, silly things like starting a family, buying a home, and retiring—all of which are emotional life milestones.
The double whammy of emotional trading and limited formal investing training is the hurdle retail investors are told they need to overcome.
Yet active fund managers can’t reliably beat the market and their underperformance isn’t typically attributed to emotion or lack of knowledge. If anything, institutional investors are too good at research, which makes it hard to have a competitive edge. (They’re the type to say in an interview that their biggest flaw is being a perfectionist, too.) Unfortunately, their real flaw is being human.
Researchers talked to 51 elite asset managers and concluded that the pressure to do the virtually impossible (aka beat the market) plus the uncertainty about how to do that created a lot of anxiety for institutional fund managers.
And the industry cannot even acknowledge how wild the expectations are, or else it would put its very existence at risk because admitting institutional investors are actually flawed, not-all-seeing mortals is to strip these professionals of their perceived authority. Talk about your whole worldview crashing down around you. 😱
So does this give you the green light to short credit defaults, seek alpha-beta derivatives, or whatever institutional investors do, just ’cause they’re no better than you? Er, not quite. (Also, we made those things up, so definitely don’t try.) And not just because you might lose money. Unlike institutional investors, the government won’t bail little ol’ you out.
At least now you know that for every tear you shed over your portfolio, there are that many Wall Street bros caught up in their feelings, too.—Myriam