New Rules for Tough Times

Should You Manage Your Own Portfolio?


If retail investors were disgruntled about the performance of financial advisers in the past few years, those feelings have likely been exacerbated by the losses stemming from the economic crisis. People are still opening accounts at online brokerages such as Charles Schwab (SCHW) and E*Trade Financial (ETFC), but increasingly they're using the portfolio management tools on these sites and eschewing the hand-holding of professional brokers.

The trend toward self-reliance is also becoming stronger as more investors discover useful investment advice and a sense of community on a host of Web sites that stress the advantages of being able to track your peers' actual portfolios to verify that they're putting their money where their mouth is.

Members of online investing communities also like the higher tone and more substantive content of the dialogue they take part in on the message boards and blog posts of sites such as ValueForum, whose users tend to be more sophisticated and insistent on having information to back up a recommended stock pick. "It's a good time to be a member of a site like this," says Adam Menzel, co-founder and chief operating officer of ValueForum. "When things are changing so rapidly, it's nice to have people to turn to for their thoughts and opinions, rather than just feeling trapped and isolated."

Preemptive Action

But Ronald RogÉ, a financial adviser and co-author of The Banker and the Fisherman: Lessons in Life, Wealth, and Happiness for the 21st Century, says the real value of advisers is in preventing clients from going down certain roads, such as chasing bloated returns during the tech bubble. "Sometimes, it's what we don't do that has an impact on their portfolios and performance more than what we do do, and they just don't see it because we've avoided certain things," he says. He also says a long-term adviser who knows your unique circumstances can offer guidance on managing your money amid situations such caring for an aged parent or dealing with a grown child who's moved back home.

Investors who do wish to fly solo need to examine their situation carefully. They have to be honest with themselves about how much they understand what they're doing and how much time they're able and willing to devote to staying on top of the market. "It really does require a lot of time," says ValueForum's Menzel. "The members who really have the most to contribute [are] either retired usually or …the people who have the time on their hands to really do it right."

Besides time and experience, how well-suited you are to manage your money may simply be a question of temperament. "I've always been a guy who more or less made his own calls, has done his own analysis, looking at the numbers, thinking about a business plan, thinking about the competition," says John Grossman, a former corporate planner who retired 14 years ago at age 43 and was one of the first people to join ValueForum. He thinks most advisers are being paid massive sums to babysit money but have no idea how to make money. "I'd rather pay me to do some of that thinking instead of handing it over to somebody else whose motivation and interest may not align with mine," he says.

Online discount brokerages such as Schwab, E*Trade, and Fidelity Investments offer basic portfolio management tools, from asset allocation tools to stock screeners that help you narrow the enormous universe of equities to a manageable group of top performers.

Different Asset Classes

A March 2007 study by Boston-based independent research firm Aite Group found that most customers of online brokerages were happy with the user-friendliness of their trading platforms but wanted more research and charting tools and better stock and fund recommendations. The customer bias toward usability hasn't changed much since the study was released, according to Aite senior analyst Adam Honore. Schwab just relaunched its Web site with an eye, in part, to usability, and E*Trade said on its fourth-quarter earnings call that it will dedicate more of its budget to improving its online presence.

What's changed, he says, are education capabilities, which are "probably creeping up as people start looking at different asset classes because equities are not really paying off right now." There's a lot more interest now among investors in how to combine futures, currencies, and other assets with stocks in their portfolios, he adds.

Honore recommends setting aside a portion of your portfolio to actively manage yourself, using the tools on your brokerage's Web site, and see how it performs. Give the remainder to a money manager to invest in the way the pro thinks best to meet your objectives.

Online financial communities are trying to make it easier to keep up by adding portfolio management tools. In late January 2009, Cake Financial launched an asset allocation view that shows a detailed pie chart of assets by class, industry and even security type "so investors can select the appropriate level of risk based on their goals," says Steven Carpenter, Cake's founder and chief executive.

Unlike most online brokerages, which break out mutual funds and exchange-traded funds (ETFs) as a separate asset class, Cake allows users to see how the funds are divided among equities and fixed income, as well among different sectors.

Benchmarking Tool

Another new Cake feature is a printable portfolio report called Investor Quick Check, which creates PDF files that can be downloaded and shared. Quick Check automatically benchmarks your portfolio performance to leading indices, and most important, to an anonymous group of individual investors in the aggregate whose portfolios are doing better than yours while taking less risk over longer periods of time. It compares Sharpe ratios, a measure of volatility, in order to gauge the risk you're taking against other investors. This tool, Carpenter says, isn't available elsewhere.

Cake decided to roll out the new features faster, betting that "with the huge market downturn, there's a lot of individual investors' portfolios that are probably unbalanced," says Carpenter. "We wanted to create the best asset allocation tools so you get visibility into how to optimize your asset allocation."

As good as he believes Cake's tools are, Carpenter suggests that anyone who has more than $1 million in assets, is nearing retirement, and/or has significant life events, would do better by consulting a financial adviser. Lately, even affluent investors are feeling dissatisfied with the professional advice they've received, according to an online poll by Chicago consulting firm Spectrem Group. Just 36% of 750 households with over $1 million of net worth polled said they feel their adviser performed well during the financial crisis; only 14% said they will increase their use of advisers in the future.

Short Shrift on Taxes

Tax advice is another aspect of portfolio management that's largely missing from sites for self-directed investors. Adviser and author RogÉ doubts there's any online tool that can, for instance, warn clients about funds they own that have distributed big capital gains after selling legacy holdings to meet redemption requests or that can provide recommendations for how to minimize the tax impact.

The Maxit feature on TradeKing's Web site is one of the few that educates users about the tax implications of their investing activities, including pointing out when two actions on the same stock or fund count as a wash trade and don't help the investor avoid unnecessary taxes. Maxit automatically takes all your trades, suggests the proper tax treatment, and generates an IRS Schedule B that you can use yourself or hand to your accountant. It also teaches investors about the differences in tax treatment for options based on broad indexes and individual stock options, says Don Montanaro, TradeKing's founder and chief executive. (Investors are required to recognize only 60% of the gain on an index option, vs. the full gain on an option based on an individual stock.).

Although investing communities such as TradeKing that are riding the social networking wave tend to grab all the attention, organizations such as the National Association of Investors Corp., also known as BetterInvesting, have been educating investors through local chapters in cities throughout the U.S. for more than 50 years. NAIC's Web site, www.betterinvesting.org, offers tools such as the Portfolio Evaluation Review Technique that assess the performance of mutual funds and compare different funds, says Bonnie Reyes, president of BetterInvesting.

Focus on Stocks

Avi Horowitz, vice-president of volunteer training and support for the Better Investing Volunteer Advisory Board, agrees that the idea of "not being in this alone" has gained traction because of the fear in the marketplace. BetterInvesting and the NAIC have 88 local chapters across the U.S. that help teach members the basic tenets and techniques of investing for $79 a year, usually through online forums. The online stock study team meets the first Wednesday of each month, and those sessions are recorded and available in online archives.

Unfortunately, the focus of the online tools and recommendations from peers on investing sites is primarily on stocks and stock-based funds, which leaves out a lot of other asset classes that advisers say are necessary to have a well-diversified portfolio. TradeKing is one of the few sites that helps investors who want exposure to fixed income assets as well as stock options. OptionMonster.com, a subscription research site that spawned online brokerage trademonster.com in October 2008, and thinkorswim.com, which is being purchased by TD Ameritrade also do a good job of educating investors about how to trade options, says Aite's Honore.

Possibly the only investing site that comes close to advocating the same widely diversified approach as most financial advisers is Marketclub.com, which educates members about—and provides trading tools for—a wide range of assets, from U.S. and Canadian stocks and mutual funds to foreign currencies, agricultural and industrial commodities in the cash and futures markets, and government bonds. Marketclub, which charges subscribers $449 a year, isn't an online broker but gives members what they need to trade various asset classes on their existing brokerage accounts.

Scare Rating Services

Marketclub lets users quickly identify which markets are going down or up and to discern trends in all asset classes, says Adam Hewison, the site's co-founder and a former trader on the Chicago Mercantile Exchange. He believes you don't need to make a huge time commitment to manage your own investments. You should be able to tell whether you should stay in or get out of any given asset if you spend even just an hour a week looking at your portfolio with Marketclub's tools.

While there are plenty of online and desktop tools designed to support investors, what's in short supply are ratings services akin to Consumer Reports that assess and compare these products and services. Computerized Investing, a bimonthly publication of the American Association of Individual Investors (AAII), advises readers on the best software and sites for tracking and evaluating their portfolios' performance. Back issues, archived online, can be searched by topic. The AAII Journal, which comes out 10 times a year, offers a discount brokers guide in its February issue, a guide to mutual funds in March, and a tax guide in December that allows investors to plan ahead for what they want to sell or keep, says editor Maria Scott.

It's daunting to go the DIY route. But for those brave enough to make their own investing decisions, there are plenty of resources available.

Bogoslaw is a reporter for BusinessWeek's Investing channel.

Bogoslaw is a reporter for Bloomberg Businessweek's Finance channel.

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