Is it worth going for Online Direct Investmemts,or should one go through a Broker ?
Individual investors now have unprecedented access to investment information and markets. Detailed security statistics and real-time news are easy to obtain online, which has leveled the informational playing field between Wall Street and Main Street. But although individual investors are constantly encouraged to "do it themselves", can they can manage their own investments as well as the professionals and without the assistance of paid advisors? More importantly, should individual investors go it alone? These are challenging questions that require honest self-evaluation to answer. Let's take a look at how an investor can tackle this subject and help you choose an individualized opinion on the matter.
Individual Investor Performance
Studies have demonstrated that the track record for individual investors is not encouraging. One famous study released in 2003 by DALBAR, a leading financial services marketing research firm, revealed that over the preceding 19 years the unmanaged S&P 500 Index earned an average of 12.22% annually. Over that same period, the average equity mutual fund investor earned a paltry 2.57% annually!
The difference in wealth accumulation between these two return numbers is staggering. Over 19 years, a $100,000 investment would grow to nearly $894,000 if compounded at 12.22%, while a $100,000 investment would grow to only $162,000 if compounded at 2.57%! However, it's important to note that the huge performance differential had little to do with the returns of the average equity mutual fund, which performed just shy of the index itself, but was most affected by the fact that investors were unable to manage their own emotions, and moved into funds near market tops while bailing out at market lows. (For more insight, see Removing The Barriers To Successful Investing.)
Spock Vs. Captain Kirk
One of the constant themes of the original '60s television series "Star Trek" dealt with the relative strengths and weaknesses of emotion verses reason. Captain Kirk, the captain of the Starship Enterprise, often made decisions based on his human instincts, which his purely logical Vulcan first officer, Spock, sometimes found irrational. However, these "gut-based" decisions yielded positive outcomes that seemed improbable based on reasoned analysis. At times, emotion and instinct proved successful, even in the face of reason. Unfortunately, while instinct prevailed in outer space, when it comes to investing, Spock would beat Captain Kirk over the long term. There are instances when following a hunch proves profitable - but not often. Over the long term, reason, logic and discipline will beat out emotion every time.
Our problem is that, like Captain Kirk, we are human. Divorcing ourselves from emotion is against our nature. Still, to the extent we are able, that is what we must do. Fear will lead you to sell just when an investment's falling price is near its bottom. Over-optimism will cause you to buy just when the price is at its peak. Disciplining your emotional side is no easy task - even for a trained, experienced professional. Before you attempt to do it yourself, you must make an honest assessment of your emotional make-up. You don't have to be Spock, but you can't be Chicken Little either!
If you determine that you have an essentially rational predisposition, you largely can control the emotional vestiges that remain by leaning on a process. You must develop some rational, logical process that will maintain discipline in the face of emotion. Without this process, you are destined to underperform. This process must be quantitative in nature and steadfast in approach.
Is it worth going for Online Direct Investmemts,or should one go through a Broker ?
Individual investors now have unprecedented access to investment information and markets. Detailed security statistics and real-time news are easy to obtain online, which has leveled the informational playing field between Wall Street and Main Street. But although individual investors are constantly encouraged to "do it themselves", can they can manage their own investments as well as the professionals and without the assistance of paid advisors? More importantly, should individual investors go it alone? These are challenging questions that require honest self-evaluation to answer. Let's take a look at how an investor can tackle this subject and help you choose an individualized opinion on the matter.
Individual Investor Performance
Studies have demonstrated that the track record for individual investors is not encouraging. One famous study released in 2003 by DALBAR, a leading financial services marketing research firm, revealed that over the preceding 19 years the unmanaged S&P 500 Index earned an average of 12.22% annually. Over that same period, the average equity mutual fund investor earned a paltry 2.57% annually!
The difference in wealth accumulation between these two return numbers is staggering. Over 19 years, a $100,000 investment would grow to nearly $894,000 if compounded at 12.22%, while a $100,000 investment would grow to only $162,000 if compounded at 2.57%! However, it's important to note that the huge performance differential had little to do with the returns of the average equity mutual fund, which performed just shy of the index itself, but was most affected by the fact that investors were unable to manage their own emotions, and moved into funds near market tops while bailing out at market lows. (For more insight, see Removing The Barriers To Successful Investing.)
Spock Vs. Captain Kirk
One of the constant themes of the original '60s television series "Star Trek" dealt with the relative strengths and weaknesses of emotion verses reason. Captain Kirk, the captain of the Starship Enterprise, often made decisions based on his human instincts, which his purely logical Vulcan first officer, Spock, sometimes found irrational. However, these "gut-based" decisions yielded positive outcomes that seemed improbable based on reasoned analysis. At times, emotion and instinct proved successful, even in the face of reason. Unfortunately, while instinct prevailed in outer space, when it comes to investing, Spock would beat Captain Kirk over the long term. There are instances when following a hunch proves profitable - but not often. Over the long term, reason, logic and discipline will beat out emotion every time.
Our problem is that, like Captain Kirk, we are human. Divorcing ourselves from emotion is against our nature. Still, to the extent we are able, that is what we must do. Fear will lead you to sell just when an investment's falling price is near its bottom. Over-optimism will cause you to buy just when the price is at its peak. Disciplining your emotional side is no easy task - even for a trained, experienced professional. Before you attempt to do it yourself, you must make an honest assessment of your emotional make-up. You don't have to be Spock, but you can't be Chicken Little either!
If you determine that you have an essentially rational predisposition, you largely can control the emotional vestiges that remain by leaning on a process. You must develop some rational, logical process that will maintain discipline in the face of emotion. Without this process, you are destined to underperform. This process must be quantitative in nature and steadfast in approach.