Flash crash immunity

The Washington Post repeats a common theme: that small investors were the hardest hit in a stock market selloff.  The story has an appealing logic. When there is a big market move and small investors are trying to get their trades executed, they may well get locked out by the fat cats who dominate trading on Wall Street.

Here’s how the Post describes the problem:

Popular trading platforms run by TD Ameritrade, Scottrade and others ran slow or not at all as panic grabbed hold. It took just six minutes for the Dow Jones industrial average to suffer its biggest drop in history. And these investors could only watch.

What the Post misses is that smart small investors were not hurt at all. Why? Because smart small investors assume in advance that they cannot play the game of timing the market or beating the market. Instead, they buy and hold index funds.  That’s a hard strategy to beat over the long haul.

Dumb small investors were undoubtedly hurt. They were trying to pull their money out after widespread predictions that Monday would be a bad day on Wall Street — and they just couldn’t sell because the system was jammed. However, had they succeeded in selling on that Monday, for most of the day they’d have gotten a far worse deal than if they had waited until later in the week.

So: Get your budget in order as I describe in my book, only invest money in the stock market that you can afford to keep invested, and don’t worry about flash crashes.