Is online stock trading for you? How about those credit cards?

NEA Today, May 2001

Money

Q: I'm tempted to start investing online but I'm worried about the stories I hear about day trading. What do you think?

A: it depends. The internet has revolutionized investing. Many investors who use it can't imagine doing otherwise.

They enjoy cheap trades, free information, and the camaraderie of fellow investors. The Web has democratized investing, providing all of us information that used to be available only to professional traders. The greatest contribution of the Internet, though, has been in education. If you are determined to learn and willing to spend the time, you can learn to become a good investor.

But I think you are wise to be concerned about the tendency of online traders to become more aggressive.

A couple of years ago, Terrance Odean and Brad Barber, two finance professors at the University of California at Davis, found that when investors moved online, their performance dropped by an average of 5 percentage points a year.

The investors they studied had been beating the market by an average of 2 percentage points a year before they moved online. As online traders, their performance lagged the market by 3 percentage points a year.

The reason was obvious: Their behavior changed. Once investors moved online, they traded more often and more aggressively, probably because they had more information and more control and because it was easier, cheaper, and more entertaining.

Average turnover in these portfolios went from 73.7 percent to 95.5 percent. "Online trading is like the Old West," the professors wrote.

"The slow die first."

In my own experience, I saw both the good and the bad. I started writing an online column four years ago and began investing online. I did become more aggressive, and I did trade more. But I also became a more knowledgeable and better investor, and I've achieved better performance.

If you do decide to go online, I suggest you set goals for yourself, both investing goals and educational goals. And beware of overconfidence, which is what Barber and Odean said led the investors in their study to trade too much. It's true that you have more information online. But the bottom line is that no one knows whether the market will head up or down tomorrow.

Q: We're facing a dilemma. We used our emergency fund to put a new roof on the house, so we don't have money for our family vacation. Our teens still want to go, and my husband says we should. I'm torn.

A: I'm with your husband. You are obviously a conscientious family with solid money habits.

You also must be pretty great parents if your kids still want to hang out with you when they're teenagers. Take advantage of that. I believe in trying to avoid regrets.

I know I would regret not saving money for retirement. But I'd also regret missing out on a vacation with my family because I hadn't saved the money in advance.

One important thing, though. You've got to be certain that you will enjoy it. If you're fretting during the entire vacation and reminding your husband and kids not to eat too much or have too much fun, you will have defeated yourself.

I think enjoying your vacation is a real art. Not many people can do it, much less whole families. If yours is one of them, by all means don't deny yourself this pleasure.

Q: What is the maximum number of credit cards a person should carry?

A: I think two Is enough. I recently got a letter from a guy who had taken my advice so much to heart that when he got married, he insisted that his wife give up all but one of her cards. and he gave up all but one of his. That's a little extreme. I think two for each spouse is fine.

Obviously, you could make an argument for having more. But I'll make my argument for two.

I've carried just an American Express card and a Visa card for years, and I've never had any trouble, even when traveling abroad. Perhaps five years ago, I had four cards but only used two.

Then I was constantly getting mail from the other two announcing rule changes that affected me, and I had to try to keep up with it. Not to mention the annoying phone calls solicitors make to try to get you to use your card more often.

Card companies don't like cardholders who don't charge. And they're likely to charge you for not charging. I know department store cards sometimes entitle you to discounts. But my feeling is that I would simply spend more if I had a store card, So I stick with my two.

-Mary Rowland

Rowland is an author and contributor to several financial planning magazines.