Orlando, FL (PressExposure) August 10, 2007 -- Technology advances have opened the arena for individuals to trade stocks on their own. Whereas lack of information used to pose a great challenge for individual investors, the Internet has made most investing related information readily available to the "do-it-yourself" investor. This has created a whole new spectrum of services and platforms for brokerage houses as companies such as Scottrade, Etrade, Ameritrade and others have spent considerable amount of time and focus on assisting individuals who want to trade stocks themselves. With all of these resources available, a new question has come to the forefront with regard to investing. While the lack of information was a challenge in a previous era, today too much information has raised the question of whether individuals should invest on their own. The breadth of information of available has heightened the awareness of individuals with regard to the level of time and effort necessary to research, pick, monitor and execute stock trades. This is not to dissuade anyone from doing so, but there are certain commitments to be made when determining if you are going to invest on your own or use the assistance of a broker, financial advisor or some other financial professional. Consider the following components of successful investing.
1) Stock Selection There are a couple different schools of thought when it comes to picking stocks. The two basic camps are the 1) Fundamental approach and 2) Technical Analysis. The fundamental approach focuses on various financial ratios, earnings, revenues, etc. in order to determine which companies are fairly or undervalued with regard to their current stock price. Warren Buffet and Peter Lynch are notable fundamental style investors. Technical analysis has a different approach. This approach uses an underlying premise that investor behavior tends to repeat itself and can be traced based on certain stock chart patterns. This technique is not so concerned with the value of the stock but rather with the price movement, volume, industry trend, etc. Charles Dow and William O'Neil are notable technical analysts or investors.
The two different approaches and their underlying premises have created a divide among investing professionals with regard to picking stocks. The purpose here is not to establish one method or approach over another. In fact, there are investors that see the value in somehow incorporating both methods into their investment approach. Needless to say, it is important to familiarize oneself with such approaches and determine which style, if not both, is best suited for ones personality and philosophy on the market. Either way, both styles require extensive studying and research in order to ensure an efficient approach to picking stocks.
2) Portfolio Composition Once you have chosen a strategy for choosing stocks, it is critical that one has a basic understanding of portfolio dynamics. To coin an old phrase, "Do not put all your eggs in one basket." This principle in investing is called "Diversification," and it plays a critical role in the performance of a portfolio. A study conducted by Brinson, Singer and Beebower demonstrated that proper diversification or "asset allocation" accounted for over 90 % of a portfolios return over a 10 year period. However, even this rule needs to be understood as it is often misapplied.
Diversification does not mean holding several different stocks in a portfolio. That is the first step towards diversification. But the follow up to that entails having stocks of different sectors (ie , retail, telecommunication, real estate, etc.), market capitalizations (sizes ie large cap, small cap, etc), and countries (domestic, international, emerging markets, etc). The next step is also determining how much of each is appropriate for one's level of risk tolerance. Many online risk tolerance questionnaires assist in helping to determine such factors.
3) Discipline, Discipline, Discipline Once the above factors have been considered and employed, the element of discipline becomes the ultimate determinant of an investor having success. It is important to assess oneself and create an investment approach or strategy that fits one's style. Once this has been developed, it is critical to implement the strategy with consistency and discipline. This has been the area that has led many to have disappointments in the world of investing. Investment decisions cannot be emotionally based. A consistent, disciplined approach to investing should eliminate the emotion out of investment decisions. But this has not been the case historically. A study by Dalbar showed that the average mutual fund investor attained a 2.57% annual return over a 19 year period while the S&P increased by 12.2% during the same timeframe. A lot of the reasoning behind the findings were attributed to investors getting in and out of the market at the wrong times due to emotionally charged events. Even conservative investors who invested in fixed income (ie bonds) instruments fared poorly. Such investors averaged 4.2% annually versus the long term government bond index that averaged 11.70% during the same time period.
So Should I do this myself? This becomes the critical question. And the answer truly lies in the ability to commit to the above mentioned elements. Many investors have made the determination to become avid students of the market in order to qualify themselves in an arena where they will compete with institutional experts. However, for those that may not have the time, desire or ability to make such a commitment, a marketplace of financial advisors is available to provide assistance in this area. Of course, choosing the right one is important and should be based on some basic tenets. Here are a few quick questions to ask before hiring an advisor:
1)How long have you been doing this? Financial Advisors have a high turn over rate when first coming into the industry. A typical rule of thumb is that a financial advisor with at least 5 years experience will probably be around for the long haul.
2)How do you get paid? Some advisors get paid via commissions while others get paid via fees. There is an extensive debate over which is more advantageous. Typically, the fee based approach tends to be more favorable as such advice may lean towards more objectivity, without the influence of how much commissions are paid.
3)How do I get serviced? One major complaint in the industry is that many clients get sold a bill of goods when first signing up and then never hear fro their advisor. This is typically true among commission based advisors as such compensation structure is based upon new sales and not ongoing service. Will you be serviced by the advisor, his assistant, some call center? Determine which way feels more comfortable for you.
4)How often do we review my portfolio? Portfolios should be reviewed annually, at a minimum. But some advisors will provide quarterly reviews.
5)What is your retention rate? One good indication of how well the advisor performs is the satisfaction of existing clients with the service provided. This is usually marked by clients not leaving.
These are just a few questions that provide some criteria for choosing a financial advisor. Of course, intangible elements come into play such as personality and connection.
The decision to be a "do-it-yourself" investor or use the services of a professional is one that many are facing, especially in light of many baby boomers retiring and having to manage their retirement funds. Which ever decision one decides, plan thoroughly as time is money, and making the wrong decision can be costly. In conclusion, personally assess which approach is right for you, prepare as you move in that direction and happy investing!