dozen stocks,” Domash says. “If you don’t have diversity, you can take one bad stock and lose two-thirds of your money.”
Of course, do-it-yourselfers can buy mutual funds online, which bypasses the hefty up-front commissions that many brokers charge while giving you more diversification. ETFs are a relatively inexpensive way for active investors to gain exposure to sectors or regions.
Another option: Your employer’s 401(k) plan, along with the usual complement of mutual funds, may provide the option of a self-directed brokerage account. Nearly 20% of 401(k) plans now offer a “brokerage window,” or account, to participants, according to research firm Hewitt Associates.
Remember, going it alone means the techniques and strategies previously employed by your broker or adviser, including asset allocation, are now your responsibility. One easy way to lessen the time you’ll need to dedicate to your portfolio is to select a mix of mutual funds. A starting point can be Morningstar’s style boxes, which are featured in every fund snapshot on Morningstar.com. The boxes quickly identify whether a fund follows the “value” or “growth” investing approaches and identifies what size companies it invests in. “You don’t need to be overly rigid,” says Lawrence Jones, a fund analyst with Morningstar. “But you should diversify by market cap and across the value/growth spectrum.”
At the most basic level, there’s no getting around the work that’s involved, because there are thousands of investment vehicles that can be purchased through the brokerage sites.
When selecting a brokerage firm, you’ll want to go by more than cost, and scrutinize the types of research and news reports that it provides. You may also want to augment your own resources with access to Morningstar and Lipper, which offer some free features but charge fees for more detailed mutual fund analysis.
Of course there are a slew of free Websites that offer surprisingly detailed information about stocks. MSN Money, for instance, lets investors screen for companies with growing sales, low debt, and a range of other attributes. Yahoo! Finance allows investors to easily spot warning signs around a stock (if it begins trading below its moving average price over the previous 50 days, for instance).
Strength in Numbers
There is no need to research, buy, or sell investments in isolation. Internet chat rooms abound, though the quality of their information varies. Still, another way to learn as you invest is by joining an investment club.
For example, in addition to his individual portfolio, Johnson invests through, and is a director of, a club that’s affiliated with BetterInvesting. The organization provides everything from a set of principles to stock selection tools (www.betterinvesting.org). Club members contribute $10 to $50 per month and research and recommend stocks to the group, which votes whether to buy. The club serves as a mini university and clearinghouse for ideas. “Probably all of our members invest outside [the] club as well,” Johnson says.
Successful do-it-yourselfers caution novice investors who look at brokerages as online casinos. Online brokerages make it all too easy to jump from one enticing stock to another