Should you open a brokerage account? |
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Are you 'captain' material?
So do you have what it takes to throw your index mutual funds overboard and navigate the rough seas of DIY investing? For many people, the likely answer is no.
Annual studies of investment behavior
from the financial research firm DALBAR repeatedly have found that, on average, self-directed investors consistently fare poorly in the market.
"They certainly suffer from all of the classic syndromes like overconfidence and the herd mentality," says Louis Harvey, DALBAR president. "If they are excited about an investment, they will jump in, which usually means they are buying
at the top. If they are depressed about it, regardless of what the data shows, they tend to get out."
It turns out some personality types just make better investors than others. Harvey says the ideal candidate is somewhere
between a hair-trigger reactionary and a total investophobic.
"The typical syndrome we see is that somebody becomes very interested and does a lot of research and makes some decisions,
then five years later they become interested again," he says. "That's not exactly managing your investments. The people who
have the will and the drive to stick with it over time are ideally suited to take responsibility themselves."
How do you know if you are one of those people? To test your affinity for brokerage investing, Tyson recommends using a virtual
investing Web site and making a few practice trades. These "practice" sites, such as
Virtual Stock Exchange, allow you to pick stocks without putting actual money at risk.
"They can help," Tyson says. "If you are inclined to want to trade individual securities, better to start with play money than your own.
They make you realize that it's a lot harder than it looks."
You can also learn more about investing through Web sites, such as Bankrate.com, and books, such as "Investing for Dummies," that
present good, objective information. Community colleges often offer beginning investing classes, and a good mentor or investment
club also can speed your education.
For a more structured approach, check into the
American Association of Individual Investors, a nonprofit organization
that seeks to cut through the hype and offer objective investing advice.
Staying in your safe harbor
When all is said and done, Tyson believes that many investors will benefit from taking a pass on brokerage accounts
and instead sticking with tried-and-true, buy-and-hold investing.
"If you're not interested in it or you're just convinced that you might make some major mistakes, it might be better
to stay where you are," he says. "If your 401(k) plan has some decent options and you're comfortable with it, it might be better
just to leave it alone. All the research shows that the more trading people do, the worse they do."
For those who do head into open financial waters, the guidance of an experienced broker or other financial expert
can serve as a lighthouse, keeping the investor from getting lost at sea.
In fact, Polster says the most difficult -- and satisfying -- part of his job is preventing clients from frittering
away their retirement through impulsive trading or ill-fated attempts to time the market.
"I honestly abhor the in-and-outers," he says. "People can do whatever they want, but I like to buy things and hold them long-term. My clients want to look across the desk and know that I'm not going to let them shoot themselves in the foot."
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