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Thursday, Mar 28, 2024

Book Serves as an Excellent Primer on Internet Investing

There are two great but polar trends in investing. One is investing in index funds because they have so regularly done better than professionally managed funds. Whether you are measuring the last three-, five-, 10- or 15-year periods, the Vanguard Index 500 fund has beaten about nine out of 10 professionally managed domestic stock funds. The superiority of low-cost index investing is so stunning that it makes the task of selecting managed funds look ridiculous. If you read this column regularly, you already know that and may be a happy couch potato investor. There is, however, another trend: competing with professional managers. The same failure of professional managers has also given rise to self-management. As Jon Markman, managing editor for the Microsoft Investor Web site and author of “Online Investing” (Microsoft Press, $24.99), puts it: “The digital age has improved and simplified few spins of the life cycle more than the task of investing. I’d argue that human relationships aren’t better on the Net, and neither are sports, art or religion. Yet finding and rapidly assimilating financial acumen is the kind of computational endeavor that is actually better accomplished on the Internet than on paper, on the telephone or in person.” The only question is how do you learn enough to become your own portfolio manager? The answer is simple: Buy his book and read it. It will cost you less than one commission at a major online brokerage firm. The last year has seen a flood of books on day trading, investing in technology, and investing in the Internet. We’ve also had about two years of “guides to investing on the Internet.” Most of these books were clumsy, ill-conceived grab bags, the kind of dimwitted catalogs that make me wonder whether the book-publishing industry deserves to live. Markman’s book is different. While it provides a virtual encyclopedia of Web sites, it starts with the models he uses for creating the portfolios that are tracked on the Microsoft Investor Web site. From screening and selecting 10 stocks for a year, to changing the portfolio on a monthly basis, his results will get your attention. (Recently, his high-turnover monthly portfolio had provided a gross appreciation of 588 percent-for this year. With appreciation like that, you can afford tax inefficiency.) From there he branches out and leads you through every aspect of gathering information on investments. Read the book treating it like an easy textbook and you have an at-your-side guide to finding and using investment information. Read it alone, and you can learn before you go to the computer. Then keep it next to your computer as a guide. Is online investing for everybody? I don’t think so. Although Markman’s prose is direct and not intimidating, my belief is that most people will be better off taking the passive investing route. I also think that Markman’s models, which are rooted in price momentum, tend to support a level of portfolio turnover that can become a problem. With that caveat, however, I’m willing to bet that a lot of people may want to manage their own portfolios, and that the Internet has made the economics of managing your own money compelling. So you ought to learn how. Skeptical? Then consider this. You can now buy and sell stocks for $15. You can pay less; you can pay more. But you don’t have to look far to find a $15 broker. That means you can establish a portfolio of 10 stocks for $150 in broker fees. Will individual investors, long term, be able to do any better than professional investors? No one knows. All we know is that millions of people are learning how to try. This book is where most people should start. Q & A I’m 63 and retired earlier this year. I took my 401(k) and pension, all in cash, of $800,000 and rolled it over with Fidelity. I’m using Fidelity’s PAS money management group to manage my portfolio, and they have put it all in 14 different mutual funds distributed as follows: 50 percent equities, 40 percent bonds, 10 percent money markets. This is supposed to be for the long term, but it is difficult to look at my portfolio every day, particularly back in August when it was dwindling. Do you think I should stick with this long-term plan and not panic? Or should I just liquidate it and put it all in a CD or some U.S.-insured security? I’ve got to have a 5.5 percent draw each year to supplement the Social Security that my wife and I both get. Z.W., Dallas I think you need to talk with your adviser about three things. First, communicate how nervous you feel when the market hits a sinking spell. Although you have a reasonable and rather conservative portfolio mix, I think there are things that can be done with your cash and fixed income that would make you feel a lot more comfortable. Suppose, for instance, that you established a ladder of Treasury bonds to cover any anticipated money needs for the next five to seven years. This would take 27.5 percent to 38.5 percent of your portfolio, less than you currently have in non-equity investments. It would also reduce your vulnerability to both rising interest rates and to a falling equity market by allowing you to avoid a forced sale over a five- to seven-year period. Second, you might ask him why you need 14 different mutual funds. It makes your statement complicated and does little or nothing for your account. What you want is results, not complexity. You can achieve a broad diversification of assets with half as many funds. Finally, you have a large account. Many investors with large accounts reduce their fee burdens by directly investing their fixed income assets in a vehicle like a bond ladder, leaving only the equity portion of their portfolio to be professionally managed. Syndicated columnist Scott Burns can be reached by fax at (214) 977-8776 or by e-mail at [email protected].

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