The Perils Of Self-Directed Investments

The internet age has brought about a revolution in the investing world. The easy access to financial information together with the growth of online discount brokers has encouraged the individual to take matters in their own hands and attempt to take control of their investments without the oversight and services of a financial professional.  Some people, unhappy with the returns of their portfolio, go looking for ways to get better returns.

Unfortunately, the journey to finding out how to self-manage and improve the performance of your investment portfolio is fraught with peril.  If you decided you wanted to learn a language or a skill of some sort, you could most likely purchase a program that will teach you what you want to know.  Sure, some programs are better than others, but most of them will actually deliver what they promise.  On the other hand, finding a reliable, trustworthy and usable methodology for improving your investment returns is not as straightforward.

The internet is full of people marketing their investment products and of stories of people who turned $1,000 into $1,000,000 or $5,000,000 or whatever other mind boggling amount.  How did they do it? What’s their secret?  Can I get in on this?

The question we should be asking is, why did they only do $1,000,000?  If they know how to turn $1,000 into $1,000,000 why don’t they turn that $1,000,000 into $100,000,000?  Should be easy enough if they’re that special!  But, assuming that indeed they did do what they said they did, did they discover something really special or were they just lucky?  Do they have a skill than can be thought or were they just at the right place and the right time?

The Problem with Following the News

One approach that people sometimes take when starting to manage their own investments is to follow the financial news media and base their investment decisions on the news of the day and the recommendations of the so called experts.  There are several problems with this approach.

The first and biggest problem is that the vast majority of these experts have no record whatsoever to substantiate their claims.  Their opinions are just that, opinions.  Sure, some of them might have made a good guess here and there but what if you were to follow their advice all the time?  How would you have done?  And what do you do when you have different people saying different things about the same opportunity at the same time? From my experience following the news media every day, this is a common occurence. How are you going to discriminate among them without a verified track record?

The second problem is that a lot of these experts as well as the news media have their own agendas that they are trying to promote.  This can be in direct opposition to the unbiased financial research that you are looking for to make an informed decision.

The third problem with this type of approach is that knowing when to enter a position is only half of the picture.  How are you going to know when to exit your position?

The Problem with Investment Websites and Software

To avoid the problems discussed above, some people look for an investment service that offers a more well defined solution through a newsletter, website or software.  Some of these services even come recommended by your broker.  For a fee these providers will tell you what to buy and what to sell following their proprietary investment technologies and secrets.

Once again the problem with the vast majority of these providers is that they do not have a complete reliable track record to verify any of their claims.  Sure, they will show you a few examples of when their investment approach worked and maybe even some examples of when it did not work.  But will they show you how your portfolio would have performed if you followed their approach every time and all the time?  You can spend thousands of dollars on investment courses and subscriptions only to find out the hard way that the approach does not work.

The Solution – A Proven Systematic Approach

The solution to the problems discussed in the previous paragraphs lies in taking a systematic approach that is based on a proven methodology.  A quantified systematic approach eliminates subjectivity and hand waving.  It takes the guesswork out of investing and replaces luck with science.  Such approach clearly defines the expected rates of return as well as the expected downside.   It is steadfast in varying market conditions as it comes confident with a proven track record.

Further Reading:

Our post What makes a good strategy? discusses in more detail the characteristics of a good strategy and how to identify a reliable strategy from an apparently good but potentially dangerous one.

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