Advice for the Small Investor

From the Editor

Advice for the Small Investor

My recommendation to balance your risk is to keep some powder dry with cash in your pocket.

Here at Kiplinger’s we have our own economic indicators. For example, there’s the poker-panel prognosis. One of our editors is in a weekly poker game, and he recounts that on one recent night the players ran down a list of what they were not spending money on: a kitchen remodel, a new car, a condo at the beach. Then there’s our monthly poll, in which 46% of readers questioned said they didn’t believe the financial system was fair to the small investor. “High-frequency trading is an unfair advantage for the big guys,” grumbled one reader.

SEE ALSO: How to Be a Better Stock Investor

With caution and cynicism so common, it’s no wonder that the outlook for the economy and the markets for the coming year is particularly murky. In reporting our annual forecast, senior editor Anne Kates Smith found that many analysts expect a volatile market at least through the election. When the dust settles, stocks could go up 6% to 7%, plus dividends of 2%. But “investors will have to work hard to earn those returns,” says Anne.

We are a lot more certain about the prospects for stocks over the long run. Buying shares is, after all, an investment in the U.S. economy and in the growth of corporate profits. Unless you think the country is going to be wiped out, stocks are still your best bet for long-term growth, and we think annualized returns of 7% or 8%, including dividends, are a reasonable expectation.


But what about those 46% of you who are concerned that small investors can’t get a fair shake? As recent market swings indicate, much of the current volatility is a result of events in Europe. High-frequency trading is another culprit. But James Angel, an associate professor of finance at Georgetown University who specializes in financial markets, points out that the little guy has always been at a disadvantage. In many ways, says Angel, these are the best of times for small investors: Buy-and-sell spreads are negligible for many stocks, commissions have hit rock-bottom, and we have a lot more tools, information and products, such as exchange-traded funds (see our guide to six great ETF portfolios). High-frequency trading is mostly an issue for would-be day traders, says Angel. “If a stock is a good long-term investment, it doesn’t matter whether you pay $10 a share or $10.01.”

But to protect yourself, you can join the big guys by investing in mutual funds. Or, if you invest in individual stocks, says Angel, always use limit orders, which let you set how much you’ll pay to buy or how little you’ll accept to sell. Never use market orders, which expose you to wild swings in the market (see more on how to cope with a volatile market).

My own recommendation to balance your risk is to keep some powder dry with cash in your pocket (see Where to Stash Your Cash). With that cushion, you can tune out the market’s noise and get a better night’s sleep.

Affordable care. The Department of Health and Human Services recently scrapped a provision of the health-insurance law that would have created a government-run long-term-care benefit. HHS acted after actuaries concluded that the program would have become insolvent. That came as no surprise to contributing editor Kim Lankford, our insurance expert, who predicted when the bill passed that benefits would be limited and would cost more than buying a stand-alone policy. As Kim writes, you have other options for covering long-term-care risks that are becoming more flexible and, unlike the government’s program, more affordable.