Focus on Finance

The Internet Investor

Version 2: The Involved Investor

By George Morgan

Last month, I wrote about the technological advances in the financial services industry that allow individual investors to customize investment strategies to match their financial and emotional situation. These options run the gamut from delegating the full process to a third party to planning and managing the entire process yourself. There also exists a whole range of strategies between these two extremes. Last month, I explored the most hands-off end of the spectrum: the defensive investor. This month, I will focus on the middle of the spectrum: the involved investor.

Involved investors, as the term implies, prefer to be actively involved in their investment choices. Though they don’t feel adequately prepared to direct the entire process unassisted, they are unwilling to simply turn the task over to a third party. Unlike defensive investors, involved investors are willing and able to devote some time and energy to educating themselves on the available investment alternatives, so long as they can count on the assistance of a professional when they need it.

The involved investor’s level of participation varies from one individual to another. They feel they have a basic understanding of the investment world and are able to direct an investment professional. When compared to defensive investors, they are also better able to deal with the ups and downs, both financially and emotionally, that are natural parts of participating in the stock market. Involved investors expect a reasonable return from their investments and are willing to accept the risks involved. They understand that their portfolio will, at times, experience a decline in capital. Generally speaking, involved investors are not totally averse to bond investments, but they are less inclined to include them in their portfolio than are defensive investors.

You will often find involved investors working with discount brokerage firms. Involved investors find this type of firm attractive for a variety of reasons. Clients at full-service brokerage firms are required to have a designated broker; the only way they are able to access the market is through that broker. Discount brokerage firms, on the other hand, are more flexible. They allow their clients the option of executing their investments on their own or consulting with an investment professional when and if they so desire.

Discount brokers also provide easy and inexpensive access to a product called a robo-advisor. Robo-advisors are computer programs that manage accounts based upon a preselected asset allocation. For example, a robo-advisor program could be set to contain 40 percent growth investment and 60 percent income-producing investment, or 40 percent in bonds and 60 percent in stocks. Depending upon the degree of control the involved investor prefers, these percentages can be set by the investor or by a professional.

The past two decades have seen a trend for investors of all stripes to move away from picking individual stocks and to rely more and more on index funds. There are several advantages to this approach. First, it simplifies the selection and monitoring process. Choosing an index funds means you gain exposure to hundreds of stocks and only have to monitor the fund itself. Second, index funds are cost-efficient. Because they are passive, they don’t make trades in order to improve returns. This eliminates transaction costs and the expense of a high-priced portfolio manager deciding which stocks to buy and sell at any given moment. Index funds are especially attractive to involved investors because they can put them in place and not have to make frequent buying and selling decisions.

Involved investors who choose to take advantage of index funds are not locked out from directing a portion of their assets to individual stocks on a regular or occasional basis. I am aware of some involved investors who get a hot stock tip at the water cooler or a cocktail party and wish to become involved. It’s not a tactic I recommend on a regular basis, but the experience of chasing a fad investment often creates better investors going forward.

Not all investors are cut from the same cloth; therefore, a one-size-fits-all approach to investment strategies is likely to disappoint. An effective way to identify an investment strategy that is right for you is to study the financial and emotional investor characteristics presented in these pages and decide which one best describes you. Once you understand your own investment personality, the matching investment strategy will fall easily into place, and the investment tools available from today’s internet-oriented financial services industry can be put to use to grow your assets. Check this column space next month for a profile of the most hands-on type of internet investor.

Editor’s Note: Professor Morgan has over 40 years’ experience in the investment field, both as a university professor and as a financial advisor. He currently serves on the faculty at the University of Nebraska at Omaha, where he directs a program designed to educate 401(k) plan participants on how to improve their investment strategy.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.