If you believe the discount brokerage houses—the E*Trades, allys, and Schwabs of the world—self-directed investing is the way to go. Save on fees! Invest for yourself! Blah, blah, blah. (And don’t even get me started on Jim Cramer.) Far be it from me to suggest that anyone not play with their money—provided they can afford to lose it. Few can, but many take the risk nonetheless. And lose.
Back in 1987, the late Martin Zweig appeared on the PBS show Wall $treet Week and told host Louis Rukeyser, “I haven’t been looking for a bear market per se… I’ve been really, in my own mind, looking for a crash, but I didn’t want to talk about it publicly because it’s like shouting ‘fire’ in a crowded theater.” The following Monday, the market took what remains its largest single-day percentage nosedive of all time: over 22 percent. All because some talking head scared the heck out of people. What was an individual investor, watching TV on a Friday night, after the markets had closed, supposed to do with Zweig’s warning? There was nothing they could do, and here’s what happened: Stocks began to sell off on Sunday night, as markets reopened in Asia, then in Europe. Come Monday on Wall Street, the Dow fell at the open, and continued its plunge throughout the day, with trading volume at unprecedented levels.
Armed only with the old Wall Street adage, “buy low, sell high,” what chance does a self-directed investor have? Even those who hold firm to that advice risk a crash every bit as devastating as that which befell thousands in October 1987. The reason? Trying to time transactions, which that old adage leads countless individuals to attempt. But think about what’s actually required to succeed in that, on a regular basis. You must get your transactions right not once, but twice, on the way in and the way out. And you must do so much more often than not. Good luck—especially once emotions come into play. They inevitably do, because every market brings moments of doom and gloom, and, as Alan Greenspan once said, of “irrational exuberance.” Both play on your emotions and drive bad decisions.
Everybody knows a crash or a correction is coming. But who knows when? We also know it’s possible to time stock purchases and sales perfectly. It’s just not probable. And so, just as the defendant who opts to represent himself has a fool for an attorney, so too the wealthy person, who thinks they can manage that wealth without help, risks it—needlessly.