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Alan Vincent
Professor Dursema
English 1010
24 April, 2015
Thinking of Investing On Your Own? Think Again
The U.S. Securities and Exchange Commission has issued this warning to those that
intend to day trade Be prepared to suffer severe financial losses (SEC.gov), yet every day
individuals choose to day trade and put their hard earned money at risk. According to Sean
Hanlon of Forbes, the average mutual fund investor has only achieved a return of 2.5% over the
last 20 years and only 1.9% over the last 30 years. Virtually every asset class, when
independently viewed, beats out the average investor. Even the U.S. Treasury Bill averages a
3.9% annualized return over time (College for Financial Planning 36).
The average investor lacks several things to be successful: the resources needed to put
together a sound investment strategy, the education to evaluate securities, and the emotional
temperament to make sound investing decisions. The intent of this paper is to provide the
average investor with some insight as to why they are ill equipped and likely to fail on their own,
in hope that they will subsequently partner with a financial advisor for their investment planning.
In the world of investing, outside of money, there are two major resources that every
investor needs to be successful: time and relevant information. If you are thinking about
working a full time job or going to school full time and day trading stocks to make a profit, think
again. According to the Securities and Exchange Commission, Day trading is an extremely

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stressful and expensive full-time job. Day traders must watch the market continuously during
the day at their computer terminals. It's extremely difficult and demands great concentration to
watch dozens of ticker quotes and price fluctuations to spot market trends. Day traders also have
high expenses, paying their firms large amounts in commissions, for training, and for computers.
Any day trader should know up front how much they need to make to cover expenses and break
even. Even if you are not planning on being a day trader, giving up part of your daily free time
to research investments is something that may sound unappetizing to all but the hobbyist
investor. Outside of the daily time needed to invest, one must also look at time horizons.
Aravind Adiga of Money poses the often overlooked question to investors How long will you
stay invested? Your answer is crucial for your asset mix. As a college student, the investments
you buy for a townhome in 5 years will be far different than the investments you buy for
retirement in 40 years.
The second part of the resources you will need is relevant information. Information
seems to be easy to come by until you realize the sheer quantity of information out there. It is a
daunting task to try and pull up and print up all the charts, investor relations reports, company
filings, etc. of each company you are interested in, let alone keep it all organized, up to date, and
relevant. As a result, professionals use subscription based information services that put all of this
information at their fingertips in a nice organize manner. Subscription based resources are fast
and efficient, but do not come cheap. At the writing of this paper, an entry level program such as
E*TRADE Pro costs approximately $100/month. If you are serious about investing and want to
use what 160,000 professionals use, Zachary Seward of Yahoo Finance has found that you can
get a Bloomberg information terminal for the bargain subscription price of only $24,000/year. If
you do not understand which investments you need for your time horizon, have the time to do the

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research, or have recent and relevant information about the companies you want to invest in, it is
time to consider hiring a financial advisor.
Next on the list of things that the average investor lacks is an educated approach.
According to Rob Turner of Money, Without question, one of the biggest mistakes that investors
make over and over is diving in without doing enough research, whether into stocks, funds, or
any other kind of investment. While one can order research reports, often times these are brief
and the only way to truly understand an investment and its behavior is to look at its technical and
fundamentals. In his book Technical Analysis of the Financial Markets, John Murphy describes
the two approaches as technical analysis concentrates on the study of market action,
fundamental analysis focuses on the economic forces of supply and demand that cause prices to
move higher, lower, or stay the same. Murphys book describes over 60 different types of
technical analysis that can be used to evaluate a security some of which contradict each other.
To analyze a stock from a fundamental standpoint you must have an understanding of economics
and accounting so you can read economic reports and company filings. According to Elizabeth
Fenner of Money, many investors seeking value stocks fail to look at the fundamentals
properly. Fenner cites the example of IBMs PE ratio making the company look like a great
value, however the PE ratio looked so low because the companys prospects had changed
dramatically. Many individuals do not understand how to use all the various forms of technical
analysis and simply have no background in economics or accounting. When investors dont
want to pay someone with the background, they often step into one of their first mistakes; relying
on message boards for expertise. According to Rob Turner of Money, The classic hot-tip
mistake has evolved into a high tech nightmare for some investors who rely on advice from the
ubiquitous financial message boards found on the internet today. With some participants trying

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to influence a stocks price on these boards, its easy for unsuspecting visitors to buy into tall
tales. In the absence of resources and education, investors fall into the trap of emotional
investing.
There are many forms of emotional investing and all of them are bad. Turner describes
one of these forms as losing sight of the big picture. Turner describes letting volatility and fear
get the hearts of investors, causing them to get in and out of stocks quick often a bad habit to
get into. Robert Frick of Kiplingers would describe excessive trading as perhaps the biggest
mistake we make as investors The logic he provides is that frequent trading results in not only
high costs, but often in errors of judgement that lead you to sell too soon and replace your stocks
with poorer choices. Frick describes this overreacting to bad news as saliency, or the tendency to
overestimate the likelihood that something bad will happen. On the opposite end of the spectrum
of trading to often is not getting out of a stock when you need to. According to Frick, this can be
caused by falling in love with a stock. Frick claims that behavioral finance teaches us that we
tend to over value our choices because we think we know more than we do and develop special
attachments to stocks. The core of this comes down to overconfidence and overestimating our
own abilities. According to Frick we tend to overestimate our odds at the worst time when
facing the prospect of losing money. Turner also chimes in on this topic and notes that investors
tend to overestimate their performance by 3-5%. On top of overconfidence, Frisk tells us that
individuals have an aversion to regret that causes investors to hold onto bad stocks longer than
they should. According to Katherine Macklem, of Macleans, you need to check in to verify
your asset mix and dump the dogs
Almost as bad as excessive trading and not getting out is the problem of not getting in to
the market. According to Turner, For some investors, the pain and loss associated with negative

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stock market experiences actually do drive them away With historical inflation number it will
be impossible to accumulate wealth without investing in the market. According to Macklem,
for most investors, it would take lifetimes before money markets would finance their
retirement. Fenner takes this even further stating thanks to the bite taken by taxes and inflation
there is a virtual guarantee that youll lose money in CDs and money funds. While you may
take a risk by investing in stocks, not investing in stocks will lose you money too.
In conclusion it is clear that the average investor has many things working against them
that can be summarized as a lack of resources, education, and emotional temperament for
investing. While resources and education can be obtained, developing the emotional
temperament for investing can be something that is virtually impossible for people to overcome.
What is the solution to the emotional investing problem? Frick states his bold idea: if you
handle your own investments and find that emotions are tripping you up, hire an advisorthe
extra cost could be worth the money. A good financial advisor will help you avoid those
emotional impulses that stem from short term fluctuations and keep you focused on the big
picture and meeting your investing goals. My hope is that after reading this paper, if you find
that you are lacking in any of the areas mentioned above that you will seek the help of a qualified
financial advisor before putting your hard earned money at risk in the market.

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Works Cited
Adiga, Aravind. "Your Personal Investment Policy." Money 31.3 (2002): 61. Academic Search
Premier. Web. 20 April 2015.
College for Financial Planning. Personal Savings: Investing for Retirement. USA: College for
Financial Planning, 2006. Print.
Day Trading: Your Dollars at Risk U.S. Securities and Exchange Commission. Sec.gov. N.d,
Web. 10 April 2015
Fenner, Elizabeth. "Avoid The 7 Biggest Investing Mistakes. (Cover Story)." Money 23.5 (1994):
74. Academic Search Premier. Web. 21 April 2015.
Frick, Robert. "Meet Your Own Worst Enemy." Kiplinger's Personal Finance Magazine 53.8
(1999): 58. Academic Search Premier. Web. 21 April 2015.
Hanlon, Sean. Why The Average Investor's Investment Return Is So Low Forbes. N.p., 24
April 2014. Web. 10 April 2015
Macklem, Katherine. "Pitfalls Of The Small Investor." Maclean's 118.6 (2005): 28. Academic
Search Premier. Web. 21 April 2015.
Murphy, John. Technical Analysis of the Financial Markets. New York: Penguin Putnam, 1999.
Print.
Seward, Zachary. This is how much a Bloomberg terminal costs Yahoo Finance. Yahoo inc, 15
May 2013. Web. 20 May 2015
Turner, Rob. "Investors' Biggest Mistakes. (Cover Story)." Money 28.9 (1999): 77. Academic
Search Premier. Web. 20 April 2015.