Dennis Smith
April is the cruelest month,” as the poet said. And as I write this, the NASDAQ is down where it was three years ago.
This drop probably could have been avoided if the Fed allowed the distribution of more money into our economy by lowering the rate by another 50 or 100 basis points (100 basis points = one full percentage point) during the month of March. But as it might be said in the firehouse, “Don’t reach for the fire hose when the barn has become a parking lot.” Look to the future, and make a plan of your investment strategy.
The first thing to ask yourself is where are my investments and what has been the result of my investment strategy? Are you in the right place, and do you have a sensible balance between stock, bond and mutual fund ownership? Are the brokerage houses or the mutual fund companies giving you the right level of care and advice? Did anyone contact you when the market began to crumble to suggest that there may be a holding pattern you should consider in your investments? Did you expect someone to contact you in a falling market?
If the answer to the first question is “good,” and “yes” to all the other questions then you have structured a good strategy for yourself. If you answered “not so good” to the first, and “no” to the others, then it is time to reconsider your strategy. Call another broker or do your investing yourself.
Hey, wait a minute. Maybe you should talk to a few more people before you start doing your own investing.Thousands and thousands of day traders have lost their shirts during this market upheaval and they are returning to more traditional investment strategies in droves.
What were their advantages in investing for themselves on-line? And, what lessons have they learned?
There is no question that the Internet has revolutionized the way Americans invest. There are hundreds of websites dispensing investing advice, dozens of firms that facilitate on-line trading and endless streams of financial data. The World Wide Web has leveled the playing field in the investment arena by giving the average Joe the same access to most of the information previously available only to Wall Street pros.
While the Internet can provide great advantages for investors, there are plenty of pitfalls too.
One thing the Internet excels at is providing information. There’s just no better source for instant stock quotes, access to company reports, and opinions and commentary from top analysts. Most of this information is available for free, while some, such as proprietary research from top Wall Street firms, can cost plenty.
A second way the Internet has changed investing is by making trading easier, faster and cheaper. Just a few keystrokes from your home computer can almost instantaneously make you an owner of companies great and small, both American and foreign. Very little paperwork is involved, and the transaction cost is just a fraction of what traditional brokerages used to charge.
But despite these advantages, the Internet has NOT proven to earn investors higher overall rates of return. In fact, a study done at the University of California at Davis shows that investors who started investing on-line (instead of contacting their brokers by telephone) actually suffered worse investment performance than those who continued investing the old-fashioned way!
Why? Are on-line investors being ripped off? Is someone in cyberspace stealing from their accounts?
Well, not exactly. In fact, the security of on-line accounts is at least as safe from thieves as more traditional custodial arrangements. The problem is that the very qualities that lure investors on-line can be big disadvantages for the unwary.
Take, for example, the streams of information available on-line. The access to this information without the needed trading experience can make one dangerously overconfident. Having data at your fingertips does not equal wisdom. There is just no substitute for hard-earned experience and education, just two of the reasons why these folks on Wall Street have big cars and vacation homes.
The other advantages of on-line investing hide similar pitfalls: the fact that on-line trading is so fast, easy, and cheap leads many to trade far more often than is prudent, and frequent trading is a sure and direct road to the poorhouse. Commissions, even when low, add up quickly. Many investors are not aware that in addition to paying trading commissions, they must pay the difference between the bid price (at which they sell investments) and the ask price (at which they buy). This spread contributes heavily to the losses of investors who trade frequently.
Trading costs and
the overconfidence caused by so much information are two factors that hurt do-it-yourself on-line investors. But perhaps an even greater danger to good investing is the psychological and emotional aspect of investing. Most of us attach very strong feelings to our money and these emotions often keep us from making rational investment decisions. Too many on-line investors make decisions based on emotions such as the “gut feeling,” “hot tip” and the illusion that “everyone else is getting rich.” Emotions lead investors to hold onto bad investments long after prudence would suggest selling, and to sell others at precisely the wrong moment.
Given all the advantages, together with the pitfalls, should you invest on-line yourself? Only you can make that decision, but please make it with prudence and caution. If you choose to invest for yourself, make sure that you devote plenty of time to research and learn how do it correctly. At the very least, you will need to read two or three good investing primers to get started, and then devote a few hours each week thereafter reading periodicals like The Financial Times and Barron’s to keep abreast of market conditions and to monitor your investments. You’ll need to learn which investment vehicles are best for you, and how to use them to your advantage.
If you don’t have the time and interest to do your own investing, of course there are competent professionals available and you would be wise to employ them. Hiring an investment advisor can free your time and efforts for the activities that you do best, as well as make your investment decisions more rational and objective. Your money is a big part of your future. Being rational and prudent with your investments will go a long way toward making your future what you want it to be.
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About the Author - Dennis Smith
Dennis Smith is the founding editor of Firehouse Magazine and the best selling author of
Report From Engine Co. 82 and other books. He has completed the federal Series 7, Series
63 and Series 65 exams and is a licensed financial advisor. Dennis Smith will be providing
some financial insight beginning with the January issue of Firehouse Magazine, as well as
authoring regular on-line commentary for Firehouse.com.
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