A beginner’s guide to managing funds

The Internet has changed our way of life. Not long ago, buying stocks was not as easy as it is now. Before execution is complete, the order passes through a complex network of brokers and experts. In 1983, a dentist in Michigan used the system developed by the current E*TRADE Financial to conduct the first online stock trading. All this changed.

Online brokers and easy access to financial data make investing your funds as easy as opening a savings account. But in an Internet-driven do-it-yourself world, is investment also a do-it-yourself activity? If so, why not just fire your financial adviser, pay less for your mutual funds, and build your own investment portfolio? Before you truly become your own financial manager, we will understand some basic knowledge of managing your own funds.

Key points

  • The vast amount of information available online may give inexperienced investors a false sense of security.
  • It is important to understand modern portfolio theory and risks.
  • First observe the market to understand how it works and how it reacts to daily events.
  • Set up a virtual simulated trading account so that you will not lose more money.

Should you manage your own money?

The first transaction made by William Porter changed the way investment products were researched, discussed, bought, and sold. Computerized trading makes the market highly liquid, and most securities can be bought and sold easily and quickly. Do-it-yourself people can now access the same free financial data used by professionals. Websites such as StockTwits have established a complete community of investors and traders that can exchange information in real time.

But just because it is possible, does this mean that managing your own money is a good idea? Professional investors have a saying: “The stock market is an expensive place to learn to invest.” They understand that losing money is easier than making money. Because of this, some people think that the large amount of information available to people with inexperienced financial background may provide a mistake. Sense of security.

The quality of tools depends on the knowledge and experience of the people who use them. Will the high-priced software packages used by the world’s best composers produce beautiful music? Will the latest innovations in surgical technology make people who have not received training in this field become the best performing surgeons?

There is no doubt that the Internet provides retail investors with the tools they need to effectively manage their own funds, but how to effectively use the knowledge and experience of these tools? For investors who want to manage their own funds, what types of basic knowledge should they have before dismissing a financial adviser?

Modern portfolio theory

It is very important to master modern portfolio theory (MPT) and understand how to determine asset allocation for individuals based on personal factors. In order to truly understand these principles, you must go deeper than the top Internet articles that tell you that MPT only understands distribution. MPT is not only about distribution, but also its efficiency. The best money managers understand how to configure your funds to maximize returns with minimal risk. They also understand that efficiency is highly dynamic as people age and change financial conditions.

Accompanying efficiency is the dynamic nature of risk tolerance. At certain moments in our lives, our risk tolerance may change. With retirement, we may have intermediate financial goals, such as saving for college or starting a new business, and we must adjust our investment portfolio to achieve these goals. Financial advisors usually use proprietary software to generate detailed reports that are not available to retail investors.

Understand the risks

Among the large amount of free resources available, risk is treated too mildly. The term risk tolerance is so overused that retail investors may think that if they understand that investments may lose money from time to time, then they understand the risks. But things are really not that simple. In fact, it is much more than that.

Risk is a kind of behavior that is difficult to understand rationally, because the behavior of investors often goes against their best interests. A study conducted by Dalbar showed that inexperienced investors tend to buy high and sell low, which often leads to short-term trading losses.

Risk is difficult to understand rationally, because investors’ behavior often goes against their best interests.

Because risk is a behavior, it is difficult for individuals to accurately and fairly understand their true attitudes towards risk. Day traders who are generally regarded as having high risk tolerance may actually have extremely low tolerance because they are unwilling to hold investments for a long time. Great investors understand that success comes from resisting emotions and making decisions based on facts. This is difficult to do when you work with your own money.

Can you beat the market?

Do you know how likely you are to outperform the overall market? How likely is it that any football player is better than most other NFL players, and if they perform better in a season, how likely are they to become the best player in decades?

The Efficient Market Hypothesis (EMH) may contain the answer. EMH points out that all known information about investment products will be included in the price immediately. If Intel releases light sales this quarter, the market will respond immediately and adjust the value of the stock. According to EMH, since all prices reflect true or fair value, they cannot beat the market for a sustained period of time.

For retail investors who are trying to pick individual stocks to get greater returns than the overall market, this may work in the short term, just as gambling can sometimes generate short-term profits. But at least in the eyes of EMH supporters, this strategy has failed for decades.

The famous investor Charles Ellis stated in his book “Winning the Loser’s Game: A Timeless Strategy for Successful Investing” that even the smartest investment talents who hire teams of researchers on a global scale are not Can beat the market in a sustained period of time.Critics of this theory cited investors like Warren Buffett who have consistently outperformed the market, but what does EMH mean to individual investors? Before deciding on your investment strategy, you need knowledge and statistics to support it.

If you plan to pick individual stocks and hope that they will appreciate faster than the overall market, what evidence is there to make you think this strategy will work? If you plan to invest in stocks to earn dividends, is there any evidence that the income strategy is effective? Is investing in index funds the best way? Where can I find the data needed to make these decisions?

Learning investment

How do you make a living? If you have a college degree, you might say that you became highly skilled not because of your degree, but because of your accumulated experience. When you first started working, were you very efficient from the beginning?

Before managing your own money, you need experience. Gaining experience for investors usually means losing money, and losing money in retirement savings is not an option.

Experience comes from observing the market and directly understanding how the market reacts to daily events. Professional investors know that the market has a constantly changing personality. Sometimes it is too sensitive to news events, sometimes it ignores them. Some stocks have been volatile, while others have shown mediocre response.

The best way for retail investors to gain experience is to set up a virtual or simulated trading account. These accounts are great for learning to invest, while also gaining experience before putting real money into the market.

Bottom line

Many people have succeeded in managing their own funds, but before putting funds at risk, learn the art of investing first. If someone wants to do your work based on what they read on the Internet, would you recommend it? If you are looking for a financial consultant, would you hire yourself based on your current level of knowledge?

Your answer may be yes, but before you have the knowledge and experience as a money manager, it may be okay to manage your brokerage account with funds that you may lose, but please leave your pension to professionals.

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