A Beginners Guide To Managing Your Money

Online brokers and easy access to financial data make investing your money as easy as starting a savings account, but in a world where the Internet has made do-it-yourselfers out of many, is investing a do-it-yourself activity and if it is, why not just fire your financial advisor or pay less fees to your mutual funds and set up a portfolio of your own?

The Internet has changed the way we live our lives. Not long ago purchasing stock was not as easy as it is now. The order went through a complex network of brokers and specialists before the execution was completed. In 1983, that all changed with a dentist in Michigan who made the first online stock transaction using a system developed by what is now E*TRADE Financial.

The Effect
That one trade changed how investment products are transacted, researched and discussed. Computerized trading has resulted in highly liquid markets making it easy to buy and sell most securities quickly. The do-it-yourselfer now has access to the same free financial data that the professionals use, and websites like Stocktwits set up entire communities of investors and traders who exchange information in real time.

But just because it's possible, does that mean that managing your own money is a good idea? Professional investors have a saying, "The stock market is an expensive place to learn how to invest." They understand that it's easier to lose money than it is to make money, and because of that, some argue that the wealth of information available to people with little financial background may offer a false sense of security.

Tools are only as good as the knowledge and experience of the person using them. Does a high priced software package used by the world's best composers result in beautiful music? Does the newest innovation in surgical technology make a person with no prior training in medicine a top performing surgeon?

There's no doubt that the Internet has given the retail investor the tools that they need to effectively manage their own money, but what about the knowledge and experience to use the tools effectively? For an investor who wants to manage their own money, what types of fundamental knowledge should they have before firing their financial adviser?

Modern Portfolio Theory
First, understand modern portfolio theory (MPT) and gain an understanding of how asset allocation is determined for an individual based on their individual factors. In order to gain a true understanding of these principals, you'll have to dig deeper than the top level Internet blog articles that tell you that MPT is simply understanding allocation. MPT is not just about the allocation but also its efficiency. The best money managers understand how to position your money for maximum return with the least amount of risk. They also understand that efficiency is highly dynamic as the person ages and their financial picture changes.

Along with efficiency comes the dynamic nature of risk tolerance. At certain points in our lives, our risk tolerance may change. Along with retirement, we might have intermediate financial goals like saving for college or starting a new business, the portfolio has to be adjusted to meet those goals. Financial advisors often use proprietary software that produces detailed reports not available to the retail investor.

Academic Understanding of Risk
In the plethora of free resources, risk is treated too benignly. The term "risk tolerance" has been so overused that retail investors may believe that they understand risk if they understand that investing may involve losing money from time to time. It's much more than that.

Risk is a behavior that is hard to understand rationally because investors often act opposite of their best interests. A study conducted by Dalbar, Inc. showed that inexperienced investors tend to buy high and sell low, which often leads to losses in short-term trades.

Since risk is a behavior, it's extremely difficult for an individual to have an accurate, unbiased picture of their true attitude towards risk. Day traders, often seen as having a high risk tolerance, may actually have an extremely low tolerance because they're unwilling to hold an investment for longer periods. Great investors understand that success comes with fending off emotion and making decisions based on facts. That's hard to do when you're working with your own money.

Efficient Market Hypothesis
Do you know how likely you are to out invest the overall market? What is the likelihood of any one football player being better than most of the other NFL players, and if they are better for a season what is the likelihood that they will be the best of the best for decades?

Efficient Market Hypothesis (EMH) might contain the answer. EMH states that everything known about an investment product is immediately factored into the price. If Intel releases information that sales will be light this quarter, the market will instantly react and adjust the value of the stock. According to EMH, there is no way to beat the market for sustained periods because all prices reflect true or fair value.

For the retail investor trying to pick individual stock names hoping to achieve gains that are larger than the market as a whole, this may work in the short term, just as gambling can sometimes produce short-term profits, but over a sustained period of decades, this strategy breaks down, say the proponents of EMH.

Even the brightest investment minds employing teams of researchers all over the world haven't been able to beat the market over a sustained period. According to famed investor Charles Ellis in his book, "Winning The Loser's Game: Timeless Strategies For Successful Investing."

Opponents of this theory cite investors like Warren Buffett who have beat the market for most of his life, but what does EMH mean for the individual investor? Before deciding on your investing strategy, you need the knowledge and statistics to back it up.

If you're going to pick individual stocks in the hopes that they'll appreciate in value faster than the overall market, what evidence leads you to the idea that this strategy will work? If you're planning to invest in stocks for dividends, is there evidence that proves that an income strategy works? Would investing in an index fund be the best way? Where can you find the data needed to make these decisions?

Experience
What do you do for a living? If you have a college degree, you might be one of the people who say that you didn't become highly skilled as a result of your degree but instead, because of the experience you amassed. When you first started your job were you highly effective from the very beginning?

Before managing your own money, you need experience. Gaining experience for investors often means losing money, and losing money in your retirement savings isn't an option.

Experience comes from watching the market and learning first-hand how it reacts to daily events. Professional investors know that the market has a personality that is constantly changing. Sometimes it's hypersensitive to news events and other times it brushes them off. Some stocks are highly volatile while others have muted reactions.

The best way for the retail investor to gain experience is by setting up a virtual or paper trading account. These accounts are perfect for learning to invest while also gaining experience before committing real money to the markets.

The Bottom Line
Many people have found success in managing their own money, but before putting your money at risk, become a student in the art of investing. If somebody wanted to do your job based on what they read on the Internet, would you advise it? If you were looking for a financial advisor, would you hire yourself based on your current level of knowledge? Your answer might be yes, but until you have the knowledge and experience as a money manager, managing a brokerage account with money that you could stand to lose might be OK, but leave your retirement money to the professionals.



More From Investopedia

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Investigators want to question engineer in Hoboken crash
    Investigators want to question engineer in Hoboken crash Associated Press - 5 minutes ago

    Federal investigators trying to figure out the cause of the deadly rail crash at the Hoboken station hoped to question the engineer and lift clues Friday from the train's black box recorders, though one ... … More »

  • Oil rises in New York, buoyed by OPEC cheer
    Oil rises in New York, buoyed by OPEC cheer AFP News - 8 minutes ago

    Oil prices finished higher in New York on Friday, two days after producing countries reached the consensus needed for a production cut. On the New York Mercantile Exchange, a barrel of West Texas Intermediate for November delivery gained 41 cents … More »

  • US stocks rally as Deutsche Bank surges AFP - 12 minutes ago

    US stocks rose strongly Friday on news that Deutsche Bank was close to a settlement with US regulators over its sale of toxic mortgage bonds before the financial crisis. US shares of Deutsche surged 14.1 ... … More »

  • Markets Right Now: Bank stocks lead a rebound on Wall Street Associated Press - 15 minutes ago

    The latest on developments in global financial markets (all times local): 4:00 p.m. Stocks are closing higher on Wall Street, led by big gains in bank stocks. Financial stocks were bouncing back Friday ... … More »

  • Grain higher, livestock lower Associated Press - 25 minutes ago

    Grain futures were lower Friday on the Chicago Board of Trade. Wheat for Dec. rose 3 cents at $4.02 a bushel; Dec. corn advanced 7.50 cents to 3.3675 a bushel; Dec. oats was up 2.25 cents at $1.7825 a ... … More »

  • The Latest: Feds seek witness accounts of deadly train crash
    The Latest: Feds seek witness accounts of deadly train crash Associated Press - 41 minutes ago

    The Latest on a commuter train that crashed into a station in New Jersey, killing one person and injuring more than 100 others (all times local): 3:35 p.m. Federal investigators are asking anyone who witnessed ... … More »

  • Nutanix exceeds expectations in upsized IPO Reuters - 41 minutes ago

    San Jose, California-based Nutanix's share price exceeds the $13.40 value last placed on its shares in a 2014 funding round, an upgrade encouraging for the many unprofitable technology companies that, like Nutanix, have been weary of testing public … More »

  • Chinese yuan set to join IMF's elite currency basket
    Chinese yuan set to join IMF's elite currency basket AFP News - 42 minutes ago

    China's yuan is poised to enter the International Monetary Fund's elite SDR basket of currencies, elevating Beijing's banknotes into a family long exclusive to global reserve assets. A symbolic coup for policymakers in Beijing, the move represents … More »

  • Canada's Fiera buys Charlemagne Capital, eyes more deals Reuters - 50 minutes ago

    Canadian asset manager Fiera Capital (FSZ.TO) announced it has bought London-based Charlemagne Capital (CHAR.L) for 40.7 million pounds ($52.8 million) and said it is in talks with several other targets. The Montreal-based firm wants to have C$200 … More »

  • Deutsche Bank woes keep stocks on steep slide
    Deutsche Bank woes keep stocks on steep slide Reuters - 58 minutes ago

    A fresh slump in Deutsche Bank's share price sent European markets into a tailspin on Friday and left world stocks sliding toward their worst week in three months. Hit by a string of fines for wrongdoing and a sharp fall in its revenues, Germany's … More »

  • IMF sets new SDR currency amounts to reflect Chinese yuan entry
    IMF sets new SDR currency amounts to reflect Chinese yuan entry Reuters - 59 minutes ago

    The International Monetary Fund said on Friday it set new relative amounts of the currencies in its Special Drawing Rights currency basket, reflecting the entry of China's yuan for the first time on Saturday. The IMF said each SDR, the Fund's unit … More »

  • Global stocks jump, euro steady as Deutsche Bank rebounds
    Global stocks jump, euro steady as Deutsche Bank rebounds Reuters - 1 hour 2 minutes ago

    By Richard Leong NEW YORK (Reuters) - Stock prices across major markets rose on Friday, while the euro stabilized as Deutsche Bank's shares recovered from record lows on a report it is close to a deal ... … More »

  • Colorado gives marijuana candy a new look to avoid confusion
    Colorado gives marijuana candy a new look to avoid confusion Associated Press - 1 hour 50 minutes ago

    Wondering if that brownie contains pot? Colorado has you covered. A requirement that edible marijuana products come with a diamond-shaped stamp and the letters T-H-C — not just on the packaging but on ... … More »

  • Trump, Clinton feud by tweet-storm over beauty queen
    Trump, Clinton feud by tweet-storm over beauty queen AFP News - 2 hours 2 minutes ago

    In an extraordinary clash that took an already bitter presidential contest down into the gutter, Donald Trump on Friday urged voters to check out an alleged "sex tape" of a former Miss Universe who backs Hillary Clinton, provoking the Democrat to … More »

  • Lagarde Urges China to Deepen Reforms as Yuan Joins Elite Group Bloomberg - 2 hours 20 minutes ago

    “The renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalizing and improving the infrastructure of its financial markets,” Lagarde said … More »

  • Q&A: Will Deutsche Bank become the next Lehman?
    Q&A: Will Deutsche Bank become the next Lehman? Associated Press - 2 hours 28 minutes ago

    Germany's biggest bank is looking shaky and some investors fear it could collapse and endanger the wider financial system. Some even wonder whether it might become the next Lehman Brothers, the U.S. bank ... … More »

  • Data storage provider Nutanix soars in market debut
    Data storage provider Nutanix soars in market debut Reuters - 2 hours 30 minutes ago

    (Reuters) - Shares of Nutanix Inc (NTNX.O), an unprofitable provider of enterprise data storage, soared more than 80 percent in their market debut on Friday, highlighting demand for tech offerings in what ... … More »

  • Here’s how dramatic BlackBerry’s fall has actually been
    Here’s how dramatic BlackBerry’s fall has actually been Business Insider - 2 hours 30 minutes ago

    BlackBerry is done making phones. The Canadian telecoms … Continued The post Here’s how dramatic BlackBerry’s fall has actually been appeared first on Business Insider. … More »

  • Sweden to join NATO strategic comms centre: director
    Sweden to join NATO strategic comms centre: director AFP News - 2 hours 38 minutes ago

    Non-aligned Sweden will join NATO's Strategic Communications Centre based in nearby Latvia amid heightened tensions with Russia in the Baltic Sea region, the centre said Friday. "Joining NATO's STRATCOM Centre of Excellence as a contributing … More »

  • Spain's Abengoa posts 3.7-bln-euro net loss in first half
    Spain's Abengoa posts 3.7-bln-euro net loss in first half AFP News - 2 hours 49 minutes ago

    Spain's debt-laden energy giant Abengoa on Friday posted a 3.7-billion-euro ($4.2-billion) net loss in the first half of 2016, as it seeks to seal a deal with creditors to ward off bankruptcy. The renewable energy firm has until an October 25 … More »

  • Oil heads for big weekly gain after OPEC-fueled rally
    Oil heads for big weekly gain after OPEC-fueled rally Reuters - 2 hours 57 minutes ago

    Oil prices were on track for their largest weekly advance in more than a month on Friday, supported by planned OPEC output cuts, but profit-taking after a two-day rally kept benchmark crude contracts below the key $50-per-barrel mark. Both Brent … More »

  • OPEC oil output hits record on Iraq, Libya boost - Reuters survey
    OPEC oil output hits record on Iraq, Libya boost - Reuters survey Reuters - 2 hours 57 minutes ago

    OPEC's oil output is likely to reach its highest in recent history in September, a Reuters survey found on Friday, as Iraq boosted northern exports and Libya reopened some of its main oil terminals. The increase comes despite lower output in top … More »

  • Dutch summon Russian ambassador over MH17 comments
    Dutch summon Russian ambassador over MH17 comments AFP News - 3 hours ago

    Dutch Foreign Minister Bert Koenders has summoned Russia's ambassador to the Netherlands over "unacceptable" comments by Moscow criticising a report into the downing of Flight MH17, officials said on Friday. "Responding to the presentation of the … More »

  • Deutsche Bank shares swing wildly amid stability concerns
    Deutsche Bank shares swing wildly amid stability concerns Associated Press - 3 hours ago

    Shares in Deutsche Bank swung wildly on Friday, touching a record low before roaring back to life, amid speculation about the stability of Germany's biggest bank and the European financial system. Having ... … More »

  • Check out the top-secret secret design studio where Ford created its GT supercar
    Check out the top-secret secret design studio where Ford created its GT supercar Business Insider - 3 hours ago

    Ford The Ford GT has been on an … Continued The post Check out the top-secret secret design studio where Ford created its GT supercar appeared first on Business Insider. … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.152-0.008-5.00%
    N21.SI
    0.12+0.01+12.15%
    40F.SI
    0.115+0.003+2.68%
    40E.SI
    0.113+0.007+6.60%
    43E.SI
    3.97-0.05-1.24%
    Z74.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.186+0.025+15.53%
    AWS.SI
    0.12+0.01+12.15%
    40F.SI
    0.164+0.016+10.81%
    40N.SI
    1.35+0.11+8.43%
    U19.SI
    0.475+0.035+7.95%
    NC2.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.36-0.24-40.00%
    AWG.SI
    0.20-0.06-23.08%
    AWI.SI
    0.27-0.03-11.48%
    BQO.SI
    0.30-0.03-9.09%
    5VP.SI
    0.265-0.025-8.62%
    BKA.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3633-0.0007-0.05%
    USDSGD=X
    1.5317+0.0017+0.11%
    EURSGD=X
    1.7669-0.0012-0.07%
    GBPSGD=X
    74.3400+0.269+0.36%
    SGDJPY=X
    5.6876+0.0036+0.06%
    SGDHKD=X
    3.0337+0.0108+0.36%
    SGDMYR=X
    9,603.1357+60.4229+0.63%
    SGDIDR=X
    4.8902+0.0032+0.07%
    SGDCNY=X
    1.0439+0.003+0.29%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,320.20-5.80-0.44%
    GCZ16.CMX
    19.25+0.06+0.30%
    SIZ16.CMX
    94.00-1.01-1.06%
    ^XAU
    2.21+0.02+0.98%
    HGZ16.CMX
    43.85+0.41+0.94%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.16+0.04
    ^FVX
    1.61+0.05
    ^TNX
    2.34+0.06
    ^TYX