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The author, a fee-only financial planner, is president of Altfest Personal Wealth Management, a financial and investment advisory firm in New York City, and an associate professor of finance at Pace University.
Are you a confirmed do-it-yourselfer? Read this before going any further.
Are you a confirmed do-it-yourselfer? Read this beforegoing any further.
Last month in this column, I presented a series of statements to helpyou decide whether you need a financial adviser. Maybe none of them describedyou, and you've opted to beginor continuemanaging your moneyon your own.
That's fine. I'm aware of several people who've become smart investorswithout any formal training. On the other hand, I also know of some whobelieved they could succeed on their own but stumbled badly along the way.To avoid their fate, you need to know a few things about flying solo.
Without a doubt, going it alone has advantages: You'll save money bynot paying for advice. You'll also be able to tailor your investments exactlyto your liking, accounting for tax considerations and your tolerance forrisk. If you need to sell, you won't have to go through an intermediary.
A less tangible but equally satisfying advantage is the sense of accomplishmentthat comes with selecting winning investments. That's certainly a big plusfor one of our clients, who manages his entire $1 million portfolio himselfand sees us just once a year for advice on how to best allocate his assets.
Like most successful do-it-yourselfers I've known, this client spendsa minimum of two hours a week researching his investments and managing hisportfolio. He looks at his mutual funds' turnover rate, expenses, and volatility,as well as their returnsabsolute, relative, and tax-adjusted. Forindividual stocks, he examines a company's price-earnings ratio, annualreports, and SEC filings, plus analysts' recommendations. He can get thesevia the Internet, often for free. (See "TheWeb's best financial sites," Nov. 8, 1999). He also finds Barron'sand The Wall Street Journal helpful sources of information. Bothare up-to-date, authoritative, and fairly easy to comprehend.
You should use these same sources, if you choose your own investments.Better still, if you have the opportunity, go beyond the raw data and examinean investment in more detail than a broker or financial adviser would. Forinstance, if you're thinking about buying a particular stock, you couldvisit a store where the company's product is sold. How enthusiastic is thesales force? What can customers tell you? What do they like and dislikeabout competing products? The successful individual investors I know canspot something about a company that others may have neglected or underestimated.
Intelligent investors also often chart a stock's price movements andlook for patterns, waiting patiently for the price to move nearer to oneof its lows before buying. They also keep tabs on who's running their mutualfunds; if a successful manager leaves one of the funds, they ponder whetherto invest their money elsewhere.
Don't get the impression that managing your money wisely is easy, evenif you devote much of your free time to it. If you spend hours buying andselling but precious little time evaluating risk or properly diversifyingyour assets, you're likely to underperform the market. You'll also havetrouble differentiating short-term problems from those that may have a lastingimpact on the investment. This could cause you to trade at the wrong time.
Like many do-it-yourselfers, you may also tend to follow the herd, buyingan investment when it's hot (read: expensive). Yes, you may end up witha winner, but it will do you little good if you buy it after the sizableprofits have been made. An acquaintance of mine just made this mistake.He bought shares of a biotech mutual fund in March, when they were closeto their 52-week high. By late April, they had dropped nearly 40 percent.He hasn't sold yet, so he may experience even more losses.
I've watched investors hang on long past the time when it made senseto sell, because they didn't want to admit they'd made a mistake. Successfulindividual investors stay unemotional about their picks and, based on thedata and hard facts, cut the cord when it's time to.
Not surprisingly, I periodically see people who thought they knew howto invest but took enough of a beating to convince them to contact a professional.Some follow my advice and learn from their mistakes. But at least as manypay my consulting fee, nod politely, then go right back to doing the samething. Only after they've bled green for a while do they begin to act onmy advice.
The bottom line: It's your money, so by all means, take charge of ityourself, if you're able. Just make sure you have the time, the patience,and the discipline necessary to do the job right.
Lewis Altfest. Investment Consult.