Sunday, May 27, 2001

Online investors learned hard lesson

When market turned, do-it-yourselfers lost. Now, they are seeking help

By Amy Higgins
The Cincinnati Enquirer

        Few investors nowadays can blindly throw money into the stock market and turn a tidy profit on their own. Instead, many are turning to professionals for help.

        “It's unbelievable how many people are saying they've tried it and don't understand it,” said Perrin Burse, chief executive officer of Burse Advisory Group in downtown Cincinnati.

        Financial advisers across the Tristate say the severe downturn in stocks in the past 14 months has been a boon to their business as former do-it-yourselfers seek their counsel.

        Proof of that trend is largely anecdotal — except that five top online brokerages collectively saw their average daily trades drop by more than 37 percent during the first three months of the year.

        “They made it look so easy, and it was so easy,” said Jeff Tavella, a Fairfield Township resident who hired a financial planner after losing $40,000 in technology stocks last year. “But it's not that way anymore.”

        The Internet, with the promise of trades as low as $8, was supposed to make full-service brokers obsolete. But when major indexes fell into bear market territory — including the once-meteoric Nasdaq Composite Index being sliced down by two-thirds — the security of guidance has outweighed the economy of self-reliance.

        “I didn't know what I was doing at all,” said David Wilkerson, who tried trading stocks over the Internet two years ago. “I thought I did — it seemed so simple.”

        It seemed simple to Mr. Wilkerson as he listened to co-workers at his billboard advertising company talk about the thousands of dollars a day they were making by actively trading. Then he lost about $3,000 in a pharmaceutical company (he doesn't recall which one) the first day he tried it himself.

        The Montgomery, Ala., man recently attended one of Mr. Burse's workshops while visiting Cincinnati because he knew he needed some professional help beyond CNBC. Mr. Burse educated him about how to research companies and what to look for in financial statements.

        Mr. Wilkerson was especially interested in the strategies for limiting losses and the risk for losses, such as setting a disciplined price to sell.

        “I was on the edge of my seat,” Mr. Wilkerson said. “If I would have known what he told me, I wouldn't have done it.”

        The mistakes Mr. Wilkerson made are common among amateur investors. All too often, they invest without conducting enough research; they don't set appropriate prices to buy or sell; and they let emotions get in the way. That's where professional help can provide some detached perspective.

        “It can really be emotional when it comes to investing,” Mr. Burse said. “You have to take out the emotion and be disciplined to limit the downside.”

        Instead of trying to actively trade, Mr. Wilkerson is now a long-term investor — holding what few stocks he has left and saving his cash to invest more prudently in the future.

        Mr. Tavella said he was making money investing in tech stocks three years ago, particularly EMC Corp., America Online and Sun Microsystems. Indeed, investors hardly lost money in any tech stock during the late 1990s.

        Another do-it-yourselfer mistake Mr. Tavella made: He didn't have the discipline to sell when he should have.

        “It wasn't that hard to make money, it just wasn't,” he said. “I had no reason to sell because there was never any thought it was going to stop.”

        But then the tech-heavy Nasdaq fell more than two-thirds from its high. Not only had Mr. Tavella lost money, but he and his wife, Jill, were expecting their second child.

        So they sought professional help, interviewing some local full-service and discount brokers. They settled with American Express Financial Advisors in Blue Ash, and now have a financial plan that includes insurance and college funding as well as retirement.

        “I don't worry as much,” Mr. Tavella said of his financial state, adding that he's gone from spending hours every night charting his portfolio's progress to not logging onto ETrade for months.

        And he apparently isn't alone.

        Indeed, five top discount brokerages — who do the vast majority of their business over the Internet or touch-tone telephone systems — reported a significant slowdown in average daily trades for the first quarter of 2001 compared to the first quarter 2000.

        • ETrade reported that its clients made 41 percent fewer trades, or an average of 136,927 trades a day compared with 232,000 daily trades the year before.

        • Fidelity Investments' clients made an average of 136,927 trades a day during the 2001 first quarter, 42.5 percent fewer than the 238,312 during the 2000 first quarter.

        • Clients of Ameritrade traded 24 percent less during those months, making 113,164 trades compared with 149,091 the year before.

        • CSFBDirect reported 53.7 percent fewer trades for the first quarter, 21,100 in 2001 compared with 44,100 in 2000.

        • Charles Schwab said its average daily trades dropped 34.3 percent, from 386,600 to 253,500, year over year for the first quarter.

        Schwab clients' average daily trades for the 2001 first quarter fell to their lowest level since the fourth quarter of 1999. The firm's trading-related revenues for the three months declined by 51 percent from year-earlier levels.

        “The volatility in the markets has caused a lot of people to basically sit on the sidelines, and wait and see what's going to happen,” said Sarah Bulgatz, a Schwab spokeswoman in San Francisco.

        Schwab has traditionally catered to investors seeking little to no guidance from advisers, with its Web pages and telephone services allowing Schwab clients to be fully self-directed. But Ms. Bulgatz said many more clients are taking advantage of the firm's consultants and seminars.

        “People are really looking for direction as to what to do,” she said.

        Just in the last several weeks, more than four such investors have signed with Jeannette Jones, president of the Asset Advisory Group in Glendale. Many others have interviewed her firm, searching for someone to help them.

        “Those folks, at the very least, are interviewing advisers now because they've seen how the past year, year and a half, has been,” Ms. Jones said. “We've seen a change in attitude.”

        One client transferred $2 million from his Schwab account because he'd lost too much in the last year handling his finances himself. Ms. Jones said his biggest mistake was following media reports of certain stocks, chasing the returns he saw listed there. By the time he bought, market conditions already were changing and the stock didn't repeat its performance.

        Mr. Burse has seen similar action at his downtown financial advisory firm and seminars. While a local day-trading firm says its numbers haven't dwindled, Mr. Burse said his new clients do include a few such investors who tried to earn a living trading professionally — but have since returned to wage-earning jobs and handed their finances back to him.

        “There's a reason why a person needs a Series 7,” Mr. Burse said in reference to a broker-dealer securities license. “Nine times out of 10, the more experienced broker is going to be better at it than the average Joe.”


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