Research shows that 85% of money managers on an average can’t beat the market, they can’t outperform their respective benchmark index funds. This is stunning since the fund managers are usually strong in their investing knowledge, extremely prolific in financial markets with excellent degree credentials like MBAs and CFAs. So why do you think this is happening? And how do these factors pay out as advantages for retail investors?

1. Investment Horizon: Fund managers and professional investors are always measured by their performance yearly or sometimes even quarterly. So Fund managers has to think in terms of quarters. The biggest advantage retail investors have over fund managers is the luxury of time. Retail investors can think in terms of decades.
2. Performance benchmarking: Underperformance any single year is not acceptable for fund managers. They have to create short term returns and alpha over the index. This leads to hyper activity and short term orientation and fund managers ends up timing the markets all the time. Retail Investors can underperform 1-2 or more years and in fact this is common among retail investors due to the nature of their portfolios
3. Portfolio Allocation: Fund managers are governed by regulatory mandates set by statutory bodies. These rules set limits to the % of shares they can hold in a company, % limits in sectors, in sizes etc. This makes them diversify into all sectors, different sizes of companies which dilutes their portfolio returns. Retail investors can allocate even 25% or 30% or even 50% of their portfolio to just 1 or 2 stocks. There are no sector constraints as well for retail investors.
4. Portfolio size: Professional funds are usually large in size and fund managers will have to manage billions or trillions of money. So they will have to invest in large companies. This is why you dont see many analysts coverage for stocks with a market capitalization less than Billion dollar. Retail investors can invest their entire portfolio in small or micro sized companies that can become large companies in the future
5. Bull and Bear Markets: Rising markets will attract a lot of money to all ETFs and funds. Fund managers have no choice but to accommodate this inflow of money and buy stocks at higher prices during the bull markets and conversely, have to sell stocks to meet investor redemption during bear markets. Retail investors can do the exact opposite, which is the ideal way of buying stocks when the market falls to get bargains

So the odds are heavily stacked against fund managers to outperform over long term. But in this information age where all information are available out there in internet, what is the real competitive advantage for retail investors in Investing? The answer is “Luxury of investing time horizon”. But the question still remains in my mind. Does the retail investor really take advantage of this ‘time luxury’?