Online trading not for everyone

By GREG COOK

Essex County Newspapers

Dave Tufts had heard the stories.

His employer's accountant's high-school-age son had invested in stocks online and tripled or quadrupled his money.

And he wondered if he could make it work for him.

He'd owned stocks before. His grandparents had given him stock when he was eight or nine. And later he bought some computer stocks through a broker.

"You know you're on hold forever and you talk to some guy who says it might go through today or tomorrow," Tufts said. "It wasn't a bad experience. I just thought it could be quicker."

So about nine months ago he decided to try investing online.

"Just because it seemed easier than calling up some guy," Tufts said.

He opened up an account at E*Trade with the minimum balance and invested in four stocks.

"For me it's kind of, it's just to learn about the things, the financial markets that control or rule the other things that go on," Tufts said. "I'm not risking so much that I need this stock to go up or I won't be able to buy lunch tomorrow."

Tufts is one of a growing number of people who have been attracted to buy stocks online by its convenience and lower brokerage fees.

Online trading accounted for nearly 16 percent of all trades during the first four months of 1999, up from about 7 percent two years earlier, according to a report by the federal Securities and Exchange Commission.

Bob Brandt, a certified financial planner with American Express Financial Advisers in Newburyport, said online investments have generally been limited to a small proportion of his customers' portfolios since the company began offering online investing in fall 1999.

"It's a mixed bag," Brandt said. "Some have done OK. Nobody's done great and some have quit. They said, `This is too much. I can't stomach this.'"

Tufts has had mixed results with his foray into online investing. He purchased $750 worth of one stock and it's doubled in value. He invested between $100 and $150 in each of the others and his investment in each is now worth around $30.

"I kind of knew that going in they were kind of riskier stocks," Tufts said. But they were the stocks he believed in. Computer companies that he thought were producing cool products. And he's held onto them.

"I guess I'll just step a little bit back now on what I personally feel," Tufts said.

As many as 30 percent of the members of the Massachusetts chapter of the National Association of Investors Corporation now invest online, said Peg Keleher, the group's vice president of education. She estimated between 30 and 50 percent of local investment clubs may purchase stocks online.

"They're not trading on-line, they're investing on line," Keleher insisted.

The difference, she said, is being more conservative and avoiding quick moves based "media hype." The fundamentals of investing should still be in place, she said, namely invest a regular amount of money over a long period of time, reinvest dividends and capital gains and diversify your portfolio.

"I think the risk here is whether the person is capable or knowledgeable of investing like that," said Robin Bullard Carter, a financial counselor with Money$ense in Newbury.

"Many people doing online stock investing haven't got the level of experience they should have. There's a lot of novices out there and it's dangerous," Brandt said. "I think it could be a danger to themselves because it may discourage them from future investments if they have a bad experience."

For uninformed traders, buying stocks can be close to gambling, Carter said.

"I think that it can create in many of us the same emotional connection as buying lottery tickets ... that if I can get the system I can do better than the people that are the financial planners," Carter said. "It takes a lot to be knowledgeable."

* * *

Jonathan Oski, a 42-year-old technology consultant from West Newbury, began trading online a couple years ago.

"They make it pretty easy," Oski said. "I can do it all myself on my own schedule."

Oski said it is easier for him to keep his financial records together online than be inundated with statements, though he still keeps paper records.

"I think I've done well, but most people have done well in the past five years," Oski said.

Most of his money _ which he plans to use to finance his two children's education _ is invested in mutual funds, he said, and for the long-term.

"I don't have the time to go in and trade everyday," Oski said. "I tend to just leave it there."

Online investors need to keep in mind their goals, Brant said. How long they're willing to wait. What their resources are. How much they are comfortable risking.

If you have a ten-year goal, he said, you'll be less worried by short-term market swings.

Online traders, Carter said, should consider if they know how to analyze financial documents or even more fundamentally than that: do they even have the financial documents?

Kelleher said online investors should be sure to invest with reputable firms and use total encryption. Online investors should be sure to get financial statements and keep records, if nothing else just to make sure they typed in the right information, she said.

Brandt still recommended that people keep in touch with a financial planner because "they will help you look at the big picture and give feedback on your strengths and your weaknesses."

Oski often discusses planned purchases with family and friends, some of whom are brokers, to help avoid bad investment decisions.

He keeps himself informed by reading some financial journals and doing research on the Internet. He doesn't worry about missing the services or the protection of a broker.

"At the end of the day there's so much information available I've got to believe I'm pretty close to the information they have," Oski said.

Still, he invests online with the discount brokerage firm Charles Schwab.

"I like that Schwab has bricks and mortar places you can walk into," Oski said.

He wants to be able to talk to someone face to face if he needs to. He thinks this is often the easiest way to resolve problems, rather than trying to sort them out over the phone or online. He likes being able to make deposits, particularly if they are large, in person, rather than worrying if he wired the money to the correct place.

Many believe that a great danger of investing online is getting bad advice online.

"You can get practically anything on the Internet and some of that information can be misleading," Brandt said. "If it seems too good to be true it probably is."

Keleher, who teaches a basic investing course at Northern Essex Community College in Haverhill, encouraged investors to read Investors Business Daily and the Wall Street Journal.

"You want to read from all points of view," Keleher said.

"I still don't recommend it to people," Carter said of online trading. "I think it's just too risky unless you have enough time and energy to do it."

Keleher worries than online investing allows uninformed investors to move faster than perhaps they should. One danger is it allows them to make rash investment decisions based on breaking financial news.

"The main pitfall is they're going to lose money because they are going to try to time the market," Keleher said. "There is a perception of speed online that may or may not be real."

"If they act emotionally, which is very typical, someone will buy high and when the market goes down they sell low ... The emotions take over and they sell, when they probably should just be buying more," Brandt said. "If you make a good pick this week, why is it a bad pick next week?"

"The bottom line is can you sleep at night," Keleher said, "or better yet, can your wife sleep at night?"

Are all these new investors _ many of whom have never seen a market downturn _ a danger to the market?

"I don't think there's a big enough impact," Carter said, especially when compared to the impact of moves made by heavyweights like Fidelity Investments.

"It's so new," Brandt said, "that I don't think anybody knows how much it moves the market."