DIY investing: Use Caution when using Tools touted to "Beat the Market"
By Gary Silverman, CFP®
Last week we started down the path of showing you a simple method to invest your money yourself. Well, really, you got a column of warnings about thinking there is some cheap gizmo out there to help you beat the market. I promise I’ll get to the meat of the do-it-yourself part next week, but first I want to continue what I started.
When you manage your own investments, you are pitting yourself against every other investor out there. What you are trying to do is exactly what investment pros try to do: beat the market.
Think about it: Actively managed mutual funds employ people who have advanced degrees in finance. Those people usually then go through multiple years of study to earn the Chartered Financial Analyst mark. During those years they are also working side-by-side with seasoned stock analysts using sophisticated trading strategies and complex computer programs to help guide them. They eat, breathe, and sleep all things investing. Fund managers typically don’t have years of experience before taking the helm, they have decades.
Still, the average fund has a really hard time beating the market.
How then, exactly, are you supposed to do it? Sure, you’ll hear of a person who does this all the time. You’ll also hear of the person who always wins in Vegas. There’s even a person who has won the lottery twice. But from what I can tell, those results are much more due to luck than skill.
Now I’m not saying that a person can’t become knowledgeable enough to pick their own stocks and bonds or to be able to predict cyclical changes in commodity prices. But that knowledge will come from study and experience, not through an easy-to-use, one-size-fits-all technology solution from the discount broker with the funniest television ad. It won’t come from a magazine that costs less than your morning latte. It won’t come from a Wall Street fighting blog. Technology can help if you know what you are doing, but it is useless if knowledge and skill are lacking.
Actually, it is worse than useless. It is dangerous. It gives people a false sense of ability. Give me a powerful chainsaw and I won’t cut down a tree quicker, I’ll cut off my leg quicker.
But there is another way to do it. You won’t get to “play” with your investments, you won’t be discovering the next great start-up to invest in, and you won’t be day-trading. No, my alternative is rather boring. In fact, you can do this by having only two investments.
Next week we will start to learn of a way, a truly easy way, to do your own investing. And for those of you who really do want to go many steps beyond that and become like me, I’ll give you my thoughts on how to get there as well.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing