Wall Street is a several block long span located between Broadway and FDR Drive in lower Manhattan. It’s synonymous with investing and corporate finance.
Wall Street also represents a particular investing approach that just happens to be false. To be sure, the basic premise of Wall Street as a place for publicly traded companies to raise money is laudatory. Beyond that, Wall Street goes mostly off the rails.
The Wall Street Marketing Machine
The physical presence of Wall Street pales against the backdrop of what Wall Street has become...a massive marketing machine. The Wall Street marketing message is themed around the brokers, analysts and others having “special knowledge.” Again, untrue.
This premise has been hugely successful for the Wall Street firms. However, this is owing largely to marketing prowess that tug on investors’ emotions. Investors buy what Wall Street sells, not because it is true, but because they want it to be true.
The Wall Street message is particularly prescient at this time of year as everything is about predictions, forecasts, and models. Again, remember they are selling “special knowledge.” What the Wall Street investing approach ignores, however, is about 60 years of academic research into the building blocks of risk and return within the markets.
How Wall Street Invests
The Wall Street investing approach is based firmly on the "grass is greener" maxim. Whatever firm or investment product you are using, many other firms claim to have something better.
Thus, investors are constantly rotating from one broker to the next. They are always in search of the “best” investment based on the “most special” knowledge possible. This, of course, generates lots of sales commissions for the Wall Street firms, but usually doesn’t pan out as well for investors.
A Better Choice…
There is another way; the Anti-Wall Street Strategy of Investing. Instead of ignoring decades of market history, this investing approach embraces market evidence. This alternative investing strategy recognizes the efficiency of the market mechanism where more than 80 million trades occur each day. The information that these investors use to make decisions helps set market prices.
Rather than trying to outguess where market prices are going, the Anti-Wall Street Strategy focuses on allowing market forces to work. Investing is always a conflict between short-term wants and long-term needs. Individuals invest their money because they need the long-term returns.
Historically, markets have rewarded long-term investors with positive returns on invested capital. If the need for returns is permanent, so too is the need to remain invested in the markets.
Investing should be done on purpose and for a purpose. If you are saving for something in the future, that need doesn’t vary with the “news and noise” of the day. Market ups and downs are to be expected. Long-term investors stay focused on the desired outcome, not the headlines.
The variables that actually impact your financial future are all within your control. To wit, how much you save, how long you save, how well you diversify and control costs, and, finally, how well you behave. Behavior actually has the position of prominence since it alone can unravel all the other components. Even the best strategy fails if you jettison out of the markets when the inevitable bumps in the road occur.
Wall Street firms amplify day-to-day volatility in the markets and use the resulting fear from volatility as a sales tool. The Anti-Wall Street Strategy recognizes the distinction between price variability (or volatility) and the permanent loss of capital.
Volatility in itself is not synonymous with risk. While individual portfolio components can experience significant volatility on occasion, it is improbable that a globally diversified portfolio will suffer permanent capital loss.
Knowing about Wall Street is one thing, but you don’t want to peg your financial future to their failed approach. Ready for a real conversation?