Mellody's Math: Do-It-Yourself Investing

N E W   Y O R K, Feb. 15, 2002 -- Over the last three years, personal investing has undergone significant changes.

The late 1990s were witness to 100 percent-plus annual gains for the online brokerage sector. Millions of people were running home to their home computers or logging on at work to place daily trades. The popular consensus was that the stock market was a fool's paradise and the Internet was a trusted means to find the hottest buys and guaranteed winners.

Enter March 2000. Dot-com became dot-bomb and the same millions lost millions on the same names in their portfolios that were off the charts for most of 1999 and early 2000.

Thousands of people quit their jobs to become full-time day traders, with little to show for it. Those who took their finances into their own hands were unpleasantly awakened from the late '90s investors' daydream.

Dramatic Shift in Focus

Online investing may not be the hotbed it once was, but people are still logging on and using the Internet to invest — just not at the same pace. In 2001, an estimated 23.2 million people around the world invested online, an increase of 13 percent from 2000.

That said, the online brokerage environment has undergone a dramatic shift in focus, from day trading to financial planning and financial advisory services.

Firms like Charles Schwab, the nation's biggest online discount brokerage, now offer a wide array of online financial planning and advisory services. Those online companies with virtual offices (and virtual earnings) have now resorted to old-fashioned bricks and mortar. E*Trade now operates mini-branches in select Target stores, offering services similar to your neighborhood bank and allowing you to purchase certificates of deposit or open up a checking, savings or money-market account.

Know When to Go Pro

While a myriad of online investment tools is sufficient for some, trends suggest people need and want more than online charts, calculators and analyst reports to make informed decisions.

The Internet brokerages are throwing their customers lifelines in the form of online advice. By the end of 2002, an estimated 82 percent of the nation's online brokerage sites will feature financial advice on their Web sites, compared with just 33 percent today.

Here's when to consider a financial adviser:

You are an emotional investor. If you are the type of person who is awash in worries about the stock market's daily ups and downs and has trouble sleeping at night in anticipation of tomorrow's opening bell, consider handing your finances over to a trained professional.

You don't have the time. For many people who balance work and family, finding enough time to allocate to investing might be impossible.

You lack the knowledge. If you are not the type of investor who reads the financial pages daily or understands investment terms, consider consulting a professional. With more than 9,000 mutual funds to choose from, choosing the ones that best suit your investment needs can be a daunting task.

The Do's and Don'ts of Financial Advisers

Investing is easy when everything goes up, but bear markets present a greater challenge, and things are harder now that the market is volatile and unpredictable. Different people require different services: Some investors will just need to have their fears allayed, while others will need comprehensive diversification plans.

Would you go to an auto mechanic to listen to your heart? The obvious answer is no. Instead, you would choose the doctor who is trained to make the correct diagnosis. Think of your finances in a similar way when looking for professional help.

Do your homework before signing up with an adviser. Investigate potential advisers with qualified referrals, and be sure to conduct interviews in advance. Just as you would with a doctor, ask for references and don't be afraid to seek out a second option.

Ask for a copy of Form ADV. This is a background sheet filed with the Securities and Exchange Commission that gives some basics on how an adviser is compensated, where he or she was schooled, and more. Be careful: Most advisers only hand out Part 2 of the form, and that is not where any disciplinary actions would appear. Those are on Part 1. Ask for it. The adviser knows that you can get this form from other agencies and should be willing to give it to you upon request. Note: Any planner who will not give you his or her ADV is not worth dealing with.

Regardless of whether you chose to work with a financial adviser or not, you're not hiring out your thinking. You cannot simply hand over your financial future and hope for the best. You need to make a commitment to learning about your finances so you can have informed discussions with your adviser. When selecting an adviser who suits your needs, be sure to choose someone willing to take the time to educate you.

Interactive Guide to Choosing a Planner

Do it Yourself … Or Not

If you feel confident in your investment knowledge and committed to educating yourself on an ongoing basis, you may want to take advantage of today's opportunity to "do it yourself."

Here are some pros of online investing:

As it's your money you're looking after, you're sure to remain focused and you can monitor your affairs as often as you deem necessary.

You save money on a financial adviser's fees.

Independent online financial advice programs typically cost between $15 and $50. But if you participate in a 401(k) plan, your employer may well have already paid to give you access to one. Even if you do have to pay for the advice, it's still cheaper than hiring a professional. And you may well receive an equally objective and useful plan.

However, do-it yourself investors need to be extremely cautious. Remember that some things are cheap for a reason. Avoid water cooler chatter and knee-jerk reactions. The key to successful investing is to devise a plan and stick to it.

The Internet boasts a wealth of free information, but the quality of research and other tools on the Internet varies widely. Message boards and stock-picking Web sites are teeming with investment advice and research, but in some cases, the people posting the information are not qualified.

Paid stock promoters and other people with a vested interest in raising a stock's price can lead unsuspecting investors astray with self-serving "expertise." Additionally, investing online presents the risk of losing money and the risk of losing something equally valuable — your time.

Calculators: Investing On Your Own

Online Red Flags

Blatant hyping. Message boards are rarely a place for thoughtful investment analysis and are more often an electronic playground for people cheerleading their favorite stocks. Keep in mind that a stock's performance is not affected by how much people would like the price to rise.

Claims of inside information. First and foremost, sharing inside information is illegal. Secondly, if someone has potentially lucrative inside information, why would they share it? Beware of people who claim to know the status of new products in development, the likelihood of a company meeting earnings expectations, or the details of large purchases in advance.

Stock promoters and bashers. "Promoters" are people are on a company's payroll to tout the stock online. Promoters are required by law to state they work for a company, but many do not. Additionally, some people promote stocks simply for their own personal gain. Likewise, "bashers" can sell short and profit from a stock's downfall. The lesson here is to do your own research.

Magic numbers. Just as a broker can give bad advice, so can a worksheet. Investors are well served to run their information through the tools on several sites to get an online second opinion.

Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, ArielMutual Funds.com. Ariel associates Matthew Yale and Anne Roche contributedto this report.