Victor Haghani, founder and chief investment officer at Elm Wealth, argued that retail investors attempting to outperform the market through individual stocks or complex exchange-traded funds may achieve better results with broad market index funds. Haghani told CNBC's "ETF Edge" this week that he is not convinced investors are significantly more sophisticated than they were three decades ago.
He noted that human beings remain subject to specific biases, particularly extrapolation bias, which leads people to believe that recent past performance will continue into the future. Haghani, who was a founding partner at Long-Term Capital Management, stated that generating alpha in the current environment remains difficult for non-professionals. He emphasized that retail investors are well served by maintaining exposure to broader index funds.
Haghani contended that access to elaborate trading strategies does not necessarily confer an advantage on individual investors. He cited major trading firms such as Citadel, Jane Street, and Hudson River Trading, describing them as entities that generate profits daily. He characterized the market as an opportunity-rich environment only for those who can spend a billion dollars annually on technology. For a retail investor trading from home, Haghani suggested that the counterparty is likely a firm like Citadel, led by CEO Ken Griffin, and that such trades are unlikely to end favorably for the individual.
Valerie Grimba, director of global ETF strategy at RBC Capital Markets, offered a different perspective on the role of sophisticated funds in retail portfolios. Speaking in the same interview, Grimba stated that increased choice is ultimately beneficial. She explained that funds holding 10 to 15 stocks allow investors to participate in specific investment themes without needing to identify the eventual top performer. Additionally, she noted that derivative-based products can be utilized to generate income in various ways.
Despite these benefits, Grimba emphasized that investors must understand the holdings and trade-offs of the strategies they select. She stated that it is more important than ever for individual investors to comprehend what they are buying, asserting that an investor should be able to explain the contents of an ETF to a friend.