Focus on Finance

The Internet Investor

Version 3: The Engaged Investor

By George Morgan

This month’s column is the last in our three-part series on internet investor personalities.

First, we discussed defensive investors, who are willing to accept minimal investment returns in exchange for maximum stability. They further wish to minimize the amount of time and effort they devote to managing their accounts. Next, we took a look at involved investors, who seek reasonable returns and wish to be personally involved in the investment process with the assistance of financial professionals. This month, our focus will be on the engaged investor, who desires to construct and direct an investment strategy with minimal outside assistance.

While many would characterize the engaged investor as more aggressive than the others we have discussed, this is not necessarily the case. They are indeed more involved than the other two types of internet investors, but their expectations concerning their investment return is often closely in line with those of the involved investor. What sets engaged investors apart is their willingness and ability to devote more time and effort to the process than the other types of investors we have discussed. Many engaged investors are fascinated with Wall Street, and some of their desire to take charge of their investments comes from a curiosity about how the market operates. Because they are more engaged in the process, they are generally more active in adjusting their portfolios in response to short-term changes in the market.

American investors currently have over $10 trillion invested with online brokers. About 90 percent of that total is in self-directed retirement accounts such as 401(k)s and IRA rollovers. The zero-percent commissions offered by online brokers, coupled with the tax-sheltered attributes of these accounts, allow engaged investors to trade freely without transaction costs that would have a negative impact on their investment return. This does not mean that all engaged investors are the wild “day traders” often panned by the popular media. It just means they can employ a strategy free from outside considerations.

There is one major caveat: People with investments in 401(k)s are limited by the investment menus provided by their employers. This often limits them to a small sampling of actively managed mutual funds and only occasional access to index fund alternatives with wider trading options. Those with rollover IRAs have the entire investment world open to them—their imaginations and investments are free to roam.

Defensive and involved investors utilize a mix of full-service brokers and online discount brokers. Engaged investors, on the other hand, seldom use a full-service broker. With discount brokers, engaged investors are free to operate without any direction from the firm. Because engaged investors make all their own decisions and executions, they don’t want to pay the fees that full-service brokers charge for advice and trades.

Seldom, if ever, will you find members of our first two groups buying and trading individual stocks. While not all engaged investors invest in individual stocks, they are many who do…and those who do are passionate about their activity. This is particularly true of engaged investors who have tax-advantage accounts at a discount broker.

The issue of monitoring investment performance is an area in which our three investment personalities vary significantly. Defensive investors seldom look at their returns and are reasonably content as long as they are not losing money. Involved investors look at their performance on an irregular basis. Their evaluation of their performance is usually based on the broad perception of the overall market that they get from the evening news. Engaged investors are acutely aware of their performance and usually measure their success by comparing their returns to a specific market index or group of indexes. In most cases, the indexes of choice are the Dow Jones Industrial Average, the S&P 500, and the Russell 2000.

Over the course of the last three months, we have discussed the financial and psychological profiles of three types of internet investors. While all take different paths to achieve their investment goals, it is impossible to categorize them by gender, financial situation, age, or any other demographic.

It is important to understand that no investor profile is inherently better than the others. Identifying with an investor profile that suits your current situation is not a lifelong commitment. Should you experience a significant change in your financial situation, you need to reevaluate your investment strategy and make the appropriate adjustments. The bottom line is to begin with a bit of homework to find the investment strategy that describes you. Once you’re comfortable with your own investment personality, it’s easy to start on an investment path that will fit you and your lifestyle.

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.