Its no coincidence that between 2008 and 2010, individual investors pulled more than $400 billion out of full-service brokerage accounts and put that money to work in discount brokerage accounts instead. This new trend toward self-directed, online investing is a very different phenomenon from the day-trading mania of the late 1990s. That was a fad driven by the frenzy for tech stocks, and it ended in disaster. The tech stock speculators of that era still havent recovered their money. But the self-directed investors of today are a different story. Theyve made a rational decision to take charge of their own investments instead of paying a small fortune to have someone else do it for them-someone whose financial interests may not be the same as those of their clients.
The trend toward online trading and investing has been helped along, of course, by the availability of things like mobile investment apps and user-friendly stock tracking software. The driving force, however, is not consumers love of new technology but rather a desire to take control of their own finances. Indeed, the pull of do-it-yourself, self-directed online trading and investing is so strong that Merrill Lynch, the biggest name in full-service brokerage, recently threw up its hands and opened up a discount operation of its own.
If people are having second thoughts about full-service Wall Street brokerages, they arent feeling much better about mutual funds, with the heavy management and marketing fees many of them impose. Mutual fund companies are ingenious when it comes to choosing statistics that show their results in a positive light. What they cant disguise, however, is the fact that most of them underperform the market as a whole. They dont perform the same as the overall market; they perform worse, largely because of those onerous fees that most of them charge.
Some people argue for investing in low-fee, passive index mutual funds, which guarantee results that are only slightly worse than the market as a whole. Passive index funds might a better choice than actively managed funds that charge high fees for mediocre performance. Even so, in todays fast-paced business environment, where companies and even industries can become outdated almost overnight, passive investing is hardly an ideal solution to the needs of ordinary investors.
Are there better solutions at hand? Indeed there are. By investing a little time and effort and harnessing the generous array of tools and data now available to everyone online-at little or no cost-investors can learn to do for themselves what many high-priced stock brokers do not do on the customers behalf. They can develop a systematic methodology for identifying the stock markets myriad opportunities, and they can pursue those opportunities with a disciplined eye toward securing their own financial futures.
Future articles in this series will elaborate upon the ABCs of developing an investment methodology. It is it less difficult than youve probably been led to believe, and, besides, most people who take charge of their own investments have fun at it.