4 Advantages the Average Investor Has Over Wall Street

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Nobody ever wants to go into a fight feeling like David up against Goliath. Fortunately, for the average retail investor competing against massive institutional Wall Street firms, there are a handful of advantages to being the little guy.

Traders at Wall Street investment banking firms such as Goldman Sachs Group (ticker: GS) and Morgan Stanley (MS) have too many advantages to count. They have access to an endless supply of resources, data, technology and trading experience. They have connections within the business world and have their fingers on the pulse of every developing story in the market. Their high-frequency trading algorithms can literally buy and sell a stock a dozen times on breaking news before the average American is finished reading the headline.

These firms have a long history of success because they recruit the top minds in the worlds of finance and technology, and they pay them handsomely to identify every possible trading edge they can.

With the odds stacked against them, it’s easy for average Americans looking to invest for retirement to get discouraged. Fortunately, there are actually some advantages to being a small retail investor rather than a big-shot Wall Street banker.

You have more options. First of all, the typical investor managing his or her own trading account is not subjected to the risk management rules that investment banks have. These banks often forbid their traders from investing in stocks priced under $5 per share or companies with a market capitalization below a certain threshold. Each institution has its own set of rules about risk levels, loss tolerance and diversification, as well.

“If institutional traders are in a losing position, they often must sell it because firm rules say they must,” says Nicholas Colas, chief market strategist for Convergex Group. “Retail traders don’t have to follow those rules and can wait out a bad trade.”

The average American retail investor is free to establish his or her own personalized set of trading rules, but Colas says some form of risk management guidelines are always a good idea.

Liquidity is less of a concern for retail investors. Institutional traders are often looking to buy and sell thousands or even millions of shares of stock at a time. Depending on market conditions, it can be difficult to get such large orders executed in a timely fashion at a reasonable price.

“Institutional traders have to move a lot of shares when they buy or sell,” says Owen Murray, director of investments for Horizon Advisors. “They have to execute their trades cautiously to prevent their trades from moving the stock price against them. This is especially true for stocks that are less liquid, such as microcap stocks.”

Retail investors buying just dozens of shares at a time typically don’t have to worry about liquidity.

Trading is cheaper. Even iconic billionaire Berkshire Hathaway (BRK.A, BRK.B) CEO Warren Buffett says retail stock investors managing their own accounts today have a distinct advantage in terms of fees.

“The investor incurs really quite little in the way of transaction costs in investing in stocks,” Buffett said in 2014. “Compared to real estate and other types of investment it’s way less, and compared to 25 years ago it’s less.”

In addition to lower costs, today’s online trading platforms provide retail investors with an unprecedented amount of information, news and market data.

“It is a great time to be a retail investor,” TD Ameritrade chief strategist JJ Kinahan says. “The amazing platforms that are now available give retail investors the ability to easily see real-time data and news. Combine that with the amazing analytical and charting tools and the retail investor can make well-informed decisions, making the market a much more level playing field.”

You have less pressure. Patience, one of the hallmarks of Buffett’s investing success throughout his career, is also a major advantage that retail investors enjoy. Investment banks and bankers are always feeling the heat to deliver quarterly returns to impress bosses, shareholders and investors. Retail investors only have to answer to themselves. In that sense, they are afforded the luxury of waiting patiently for years for an investment thesis to play out in the market rather than being forced to chase market gains on a week-to-week basis.

Even with the advantages mentioned above, it’s still difficult for the average investor to compete with professional Goldman Sachs traders and algorithms. Fortunately, there are plenty of long-term stock market gains to go around.

Since 1926, the rolling 30-year annual return of the Standard & Poor’s 500 index has stayed between about 8 percent and 15 percent. By choosing a low-cost, diversified index exchange-traded fund that invests in blue-chip stocks, such as the Vanguard 500 Index Fund (VOO) or the Schwab U.S. Broad Market ETF (SCHB), retail investors can capture that long-term market growth without even worrying about competing with professional traders on Wall Street.