Smart Money vs. Dumb Money

Could there be a 3rd category?

Smart Money

Big institutional investors and mutual fund companies are labeled “smart money.” These investors have somewhat of an unfair advantage over your run-of-the-mill individual investor. Armed with teams of experienced investment analysts, “smart money” investors can evaluate exactly what’s going on in the market, allowing them to make more informed investment decisions.

This does not necessarily mean they always make smart decisions—in fact, plenty of them make bad trades from time to time. They simply have access to valuable information that allows them to make a more educated choice.

Dumb Money

On the other hand, the average investor generally does not have the time, experience, or patience to methodically analyze corporate reports or the global economy. Because these investors don’t have access to teams of analysts or carefully compiled data, they often make trades based on instinct or a gut feeling.

Consequently, the “dumb money” group tends to buy and sell investments at the worst possible time. They buy stocks when prices are on the rise and sell those stocks when prices start to decline. For the average investor, the stocks they buy go on to underperform, and the stocks they sell go on to perform very well. Perhaps this is why average investors' portfolios typically earn 1% to 2% less than the average mutual fund.