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Lessons in do-it-yourself investing
Paul B Farrell | June 29, 2007
Millions of American investors are making the transition to self-directed investing. As Peter Lynch put it in One Up on Wall Street, "Rule #1, in my book, is: stop listening to professionals. Twenty years in this business convinces me that any normal person using the customary three per cent of the brain can pick stocks just as well, if not better, than the average Wall Street expert. Think like an amateur...If you're a surfer, a truck driver, a high school dropout, or an eccentric retiree, then you've got an edge already."
You can build a winning mutual fund portfolio by yourself, because all of the expertise you need is now available to you. Wall Street's historic monopoly over financial information no longer exists - investors today are not dependent on their brokers for tips or information resources. The power has shifted from Wall Street's institutions to Main Street America.
Discount brokerage first weakened Wall Street's stranglehold in the 1970s. On-line technologies widened the gap in the 1980s and 1990s. Now we're entering a new phase in this revolution, with the emergence of the self-reliant, self-directed investor.
The new do-it-yourself investors are taking control of their financial future. Armed with a new spirit of confidence, they are discovering the best tools to accomplish their goals and quickly learning how to use these tools to build successful portfolios. No-load, high-performing funds and other discounted services advance this new freedom.
A new age of insecurity - and financial self-reliance
In decades past, American investors relied on a variety of institutions - the government, employers, and Wall Street - to guide them safely into retirement. They made the key financial decisions affecting our lives. Someone else had the information and the resources, so individual investors were dependent on their authority and wisdom.
This is not the case today. Now investors are moving through a new age of insecurity. Concerns about their financial futures are forcing American investors to become self-reliant. And they're rising to the challenge. Today, investors are not only financially savvy and computer-literate, they're also filled with a confidence that they can indeed manage their own financial future far better than any outside authorities, in government, corporate America, and Wall Street's institutions. It's easy to do so with mutual funds.
An explosion in mutual funds
Nowhere is this trend toward self-reliance and independence more obvious than in the explosive growth in the mutual funds owned by individual investors. US mutual fund assets have exploded more than twenty-fold since the mid-1980s Fidelity Investments alone, the largest US mutual fund family is now larger than the entire mutual fund market of the mid-1980s.
Today there are over 10,000 funds to choose from, a tenfold increase over the mid-1980s, with 500 to 1,000 new funds being added every year. In fact, there are now more four- and five-star top-performing funds than there were total funds a decade ago. As a result, advertisements for mutual funds are now so loaded with stars they look like ads for Hollywood movies.
Four phases in America's financial revolution
Phase One. The advent of the discount broker in the mid-1970s marked the start of the individual investing revolution. Savvy investors suddenly had a bonanza of new options.
Phase Two. Beginning in the early 1990s, the number of investors with on-line brokerage accounts at Schwab and the other on-line pioneers grew from fewer than 100,000 in 1993 to more than 5 million in five years. Fifteen million more were predicted for the early years of the next decade.
Phase Three. The late 1990s brought new on-line tools and the continuing proliferation of financial information � making it possible for individuals to manage the explosion in mutual fund choices. This effectively diminished Wall Street's historic monopoly on financial information, and empowered individuals to take command of their portfolio choices.
Phase Four. From 2000 on, investment technologies are advancing so rapidly that all individual investors have access to on-line power tools that can automatically handle all the analysis, planning, portfolio monitoring, and trading, as do-it-yourself investing becomes the standard.
Investors' demand for new investment opportunities is so intense today that fund managers, brokerage firms, and financial advisers are doubling and tripling their advertising budgets to capture market share, and are routinely moving into the television and Internet media.
Fueled by this increasing tide of new advertising monies, the major financial magazines are expanding coverage of mutual fund news substantially, providing their readers with more and better information with which to make financial choices. The cost is next to nothing compared with brokerage fees.
You can do it better yourself
True, the amount of information out there presents its own challenges. But the good news is that information continues to get better and cheaper. Investors are discovering a host of new keep-it-simple solutions, and not just through high-tech and online resources.
Driven by a commercial need to sell their periodicals and to compete for ad dollars and readers, even the print media are transforming themselves into low-tech wholesale providers of professional-quality financial advice. Whatever you need to know about your mutual funds - it's out there and easy to get.
Being a do-it-yourself investor means using a total approach and focusing on mutual funds for the long term. It means integrating financial planning, simple asset allocation models, and disciplined portfolio management. Do-it-yourself investors should never chase the hot fund of the week or gamble their future on short-term market swings. They want funds and fund managers with long-term, proven track records.
Creating a winning mutual fund portfolio with appropriate asset allocation models is an ideal way for investors to keep it simple and eliminate the cost of the middleman.
Burton Malkiel - former member of the Council of Economic Advisers, former governor of the AMEX, and author of A Random Walk Down Wall Street - offers this bit of encouragement: "Many people say that individual investors have scarcely a chance today against Wall Street's pros...Nothing could be further from the truth. You can do it as well as the experts - perhaps even better." Do it yourself.
The Winning Portfolio: How to choose the best mutual funds
By Paul B. Farrell
Publisher: Vision Books
Price: Rs 145
Paul B. Farrell, J. D., Ph.D., is the mutual funds editor of CBS MarketWatch, where he writes the "Farrell-on-Funds" column and maintains the SuperStar Funds database. He is the author of three previous books on investing and has been an investment banker with Morgan Stanley, associate editor at The Los Angeles Herald Examiner, and chief operating officer of the Financial News Network, USA.
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