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MONEY MANAGEMENT


Managing Your Investments

10/24/00 02:47:33 PM PST
by David Penn

You're ready to invest. But are you ready to manage your investments? Here's a primer on some of the issues to consider when you're deciding who will manage your money.

If the idea of managing your own investments sounds daunting ("Manage my own investments?! I can hardly balance my checkbook!"), relax. By deciding to invest your money, you've already taken a giant step toward maximizing the amount of money you earn and save. While your spendthrift peers "save tomorrow for tomorrow," so to speak, your commitment to investing will provide you with greater security down the road and more peace of mind right now.

A large part of managing your own investments has to do with managing your investment objectives. Are you saving for your retirement? If so, how many years do you have until you retire? Are you saving for your first house, or college tuition for your children? Another important question is: how much time do you have before you need your investment money? Thirty years? Ten years? Five? By understanding why you are investing (other than because you know you should), you'll be in a much better position to determine how your various investments should be managed.

Once you've decided to invest, deciding how you will manage your investments is important. Investment management runs the gamut from brokerage houses and mutual fund companies that can help you select specific stocks or stock funds, all the way to full-service financial planners who combine your investment objectives, tax status, income, and other personal financial information into an overall picture of your financial health. But before you start hunting for financial advisors, consider some of the benefits -- and risks -- of managing at least part of your investments on your own.

Managing your own investments
One of the greatest fears many people have when thinking about managing their own investments is: Where do I get the information necessary to choose growing stocks and/or winning mutual funds? There's a good reason for that. With more than 6,000 different stocks available at any given time and thousands of mutual funds, deciding which stocks and mutual funds are going up can be an overwhelming task.

In addition to Working Money, there are hundreds of books and Websites that offer sound advice on everything from stock and mutual fund selection to tax planning for capital gains. And anyone who is serious about managing his or her own investments would be well-advised to refer to some of the great stock market books written by famously successful investors like William O'Neil, founder of Investor's Business Daily, and Peter Lynch, former manager of the Fidelity Magellan fund. In addition to providing ideas about individual stock selection and building a stock portfolio, books like these help novice and intermediate-level investors by being encouraging, optimistic, and confident in the ability of average investors to profit in the marketplace.

Many people are interested in managing their own investments, choosing their own stocks, and selecting their own mutual funds. But some fear they do not have enough time to devote to the task of researching and analyzing what can appear to be a staggering amount of financial information. Since most of us have already divided our time between work and family and rest and recreation, there often seems to be little time for much else -- especially something as serious as managing your financial future. Wouldn't a professional money manager be better?

Figure 1: Hanging on for the ride. Managing your own investments can mean suffering through dramatic declines before finally reaping gains. Will you be able to handle the downturns on your own?
 
In some cases, absolutely! If managing your own investments is -- or becomes -- a dreary, grudging experience, then you are better off having a professional money manager or financial planner play an active role in helping you meet your investment goals. As important as planning your financial future is, it should not have to be an everyday (or even weekly) affair. If you fear you're going to spend more time looking at stock tables and mutual fund performance charts than looking after your family, then professional management may be the thing for you. However, most people who manage their own investments do so at least partly because they enjoy it. As much as following a favorite sports team or the career of a favorite entertainer, managing investments can be both fun and exciting. In fact, many of those who prefer to manage their own investments do so largely because they enjoy comparing mutual funds and researching stocks, taking an active hand in their investments.

Another aspect of managing your own investments has to do with temperament. How will you treat yourself if an investment decision you make goes badly? Since not every stock selection or fund investment will turn out to be a winner (in fact, some market professionals suggest you will be lucky to be correct 50% of the time!), understanding how you will handle the inevitable losses is an important factor to consider -- preferably before they occur. You may be able to cope with the endless volatility of the stock market better if you are removed from the everyday advances and declines of the market, with a professional handling the bulk of your investment capital.

On the other hand, are you the sort of person who is liable to blame your broker for losses during a bear market in which no one is making much money? Stockbrokers, like everyone else, are capable of making mistakes. If you are more forgiving of your own errors than someone else's, then there may be an additional factor in favor of your managing your own investments. The time spent complaining about your broker's stock picks could be spent researching companies to make picks of your own.

Empowering investment
One of the main reasons many people decide to manage their own investments is control. Managing your own investments means making the decisions on how much -- and what kind -- of risk you want to take in the marketplace. While any stockbroker or mutual fund family can plot a more or less aggressive investment path, managing your own investments allows you to fine-tune your investment profile. Perhaps you are conservative with regard to stocks and prefer the risks and rewards of a growth and income mutual fund. At the same time, maybe you are aggressive when it comes to bonds, and decide to make a high-yield corporate bond fund part of your portfolio. There are balanced funds, which are mutual funds that combine these approaches. But by managing your own investments, you can adjust the weighting or emphasis in your portfolio (heavier on stocks, heavier on bonds, or a balance) much easier and faster.

The more you learn about your own finances and investments, the more you become interested in the economic world around you. The business section of the daily newspaper that you might have once skipped over or the market wrapup segment on the evening news that used to be your cue to take out the garbage become a hundred times more interesting when you begin making your own investment decisions. In fact, after only a while, everything from the price of gasoline to the lines of shoppers at your favorite department store takes on an added, economic meaning. Some people who started out as everyday investors have become so enamored of the financial world that a whole new array of career and post-retirement opportunities as credit counselors, investment "tutors," and even financial writers (!) has opened up for them.

As investors spend more and more time managing their own investments, often a certain confidence and empowerment take hold. While a string of particularly good stock selections or a great year in the mutual fund may encourage an investor to become a little overconfident, the knowledge you are paving the way toward your own financial independence (or, at least, a comfortable retirement) can be immensely satisfying. And the sooner you adopt an investment plan, the more rewarding your plan will be.

Making the decision
It is important to remember there is a world of investment management decision-making between the conservative money market account and the volatile world of daytrading. In fact, most investors find themselves happily (and profitably) between these two extremes. Managing your investments is not an all-or-nothing game; you may decide to own a professionally managed mutual fund, and at the same time own three or four stocks you purchased through an online or discount brokerage like Ameritrade or Charles Schwab.

Managing your own investments does not mean going it alone. When an unfamiliar financial situation or major economic change occurs, managing your own investments also means asking for help from qualified professionals when you find yourself needing advice. While it is good (or at least normal) to take pride in making your own investment decisions, never let pride stand in the way of seeking assistance -- whether you need help in figuring out the tax ramifications of your capital gains or need better guidance in selecting worthwhile stocks.

Finally, whether you manage your own investments through a traditional brokerage house, a mutual fund company, or a discount or online service, remember that your investments are your money, regardless of who is managing it. Whoever is investing your money, you are still the one ultimately responsible for it. If you select a stock that declines, then it is your responsibility to decide whether to hold on or sell. If you invest in a mutual fund that performs poorly, then it is your responsibility to stay put, shift to another fund, or choose another mutual fund company that has been performing better. After all, when you invest, it is your financial future you are preparing for. Take the time to decide just what your investing goals are, then save as much money as you can and put it in the best hands possible.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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