Yes, the Investing Game is Rigged

July 14, 2016

Do you ever feel like the investment game is rigged against the “little guy?” In some ways, that’s true. The “little guys” (and gals) generally don’t have enough money to access institutional funds (except maybe in their employer’s retirement account), can’t afford to hire the top investment managers, aren’t allowed to invest in hedge funds, and don’t qualify for some of the best bank rates. The value of many of those investment managers and hedge funds is dubious though. On the other hand, here are some investments for each asset class that the “little guy” actually has an advantage in:

Cash: Reward Checking Accounts. These accounts are insured and if you meet their requirements, they can pay up to 5% in interest and often reimburse ATM fees. The catch is that the high interest rate is only on the first $5-20k, depending on the institution. That may not be worth the hassle for wealthier individuals with hundreds of thousands or even millions in cash, but may be the entire cash savings for the rest of us.

Bonds: US Government Savings EE Savings Bonds. These bonds are fully backed by the federal government, do not fluctuate in value, and are tax-deferred (and tax-free for education expenses if you meet the criteria). Their interest rate is pretty low right now, but they’re guaranteed to at least double in 20 years, providing a minimum 3.6% rate of return. In comparison, the rate for 20-year treasury bonds is only 1.82%, and they can lose value if interest rates rise. However, each person can only purchase up to $10k a year of Series EE bonds, which is one reason why wealthier individuals and institutions stick to regular treasury bonds despite the lower rate and higher risk.

Stocks: Micro Cap Stocks. Studies have found that these stocks with a capitalization of less than half a billion dollars have produced higher returns than larger stocks even when adjusting for risk, and they tend to move differently from other stocks so they can help diversify a portfolio. Because these stocks are generally too small to be purchased by mutual funds and are seldom followed by Wall St analysts, they also offer more opportunity to find bargains. (In fact, this inability to invest in the smallest of stocks has made investing harder for Warren Buffett compared to when he first started.)

Alternatives: Direct Real Estate. The main reason that it’s so hard to beat the stock market is because knowledge about stocks is publicly available. It’s like trying to find money on the street when everyone else is looking too. That’s not true of the real estate market though. Big investment firms can’t afford to hire people to inspect every piece of real estate and even if they could, most properties are too small to be worth it for them.

When you’re buying your home or an investment property, you have the ability to add value by researching the location, having the property inspected, negotiating the price, fixing it up, and then managing it. All of that work can translate into higher returns. (Don’t forget that it is work though.)

Wall St has a lot of advantages over the rest of us, but that’s not always true when it comes to investing. You have the opportunity to earn returns that the Buffetts of the world can only dream of. So yes, the investing game is rigged…in your favor.