Institutional vs. Retail Investing

Institutional investors now comprise over 60% of the U.S. stock markets. This is up nearly 20% from 20 years ago. How institutional investors invest has a huge impact on the direction of the stock market. Many institutional investors are mutual funds so some of this shift comes from retail investors who did not invest before and now buy mutual funds for the knowledge that fund managers bring and for diversification. Not many actively managed mutual funds beat their indexes so individual investors are increasingly buying index funds and passively managed ETFs. Retail investors who buy stocks play an increasingly small part in the overall stock market and its direction and when they do buy they need to be extra cautious because an institutional investor that sells their entire stake in a company can cause a stock price to drop precipitously. Likewise, if a mutual fund buys a large stake in a company, the stock price may rise as demand for shares increases.

What this all means is that retail investors should perform due diligence when buying a company's stock to determine if artificial demand for shares has created a mini-bubble in a share's price which could be difficult to recover from when the share price stabilizes in line with its fundamentals. When retail investors follow institutional investors in a particular company, the retail investor will see diluted earnings or out-sized losses if the buy at the wrong time so they must be cautious when buying individual stocks.

The Global Economy is No Match for a Capitalized Media

I am back from an extended summer vacation with my batteries fully recharged so that I can clearly visualize the direction of the global economy and its impact on the stock and bond markets. My goal with this post is to provide some educated thought on how the average investor can protect what they have and still earn a decent return on their investment while the market tosses and turns like an insomniac nearing their next month without sleep.

The bottom line is that the global stock market, with the possible exception of emerging markets, is now driven more by human behavior than economic fundamentals which is exacerbated by the media who overly dramatize financial and economic news and are not beneath doing a little fear mongering to sell newspapers and ratchet up viewer ratings. In its present weakened state, the global economy is no match for a capitalized media! I will take up how to deal with the Pavlovian response of the markets to a media gone amok in a later post.

Sadly, the lower we are on Maslow's Hierarchy of Needs, the worse the stock market's impact has been on our retirement portfolios and, with housing foreclosures rampant, many of us are preoccupied with finding a place of shelter instead of assessing the health of our portfolios. To those I say get your house in order and then make a personal recovery plan to salvage your retirement portfolio. This is critically important and must include sufficient cash for liquidity, bonds and not bond funds, dividend stocks, and some low cost emerging market mutual funds or ETFs to even things out. I will provide more details on how to structure a retirement portfolio in today's market in my September "Smarter Investing" newsletter.