Hurt investors seek quick, risky returns

NEW YORK — Stung by big losses in the bear market, some individual investors are souring on traditional buy-and-hold investing in favor of aggressive trading aimed at scoring big gains.

Trading at online brokerages has soared in recent months as investors have tried to capitalize on rising securities markets. But individual investors increasingly are embracing strategies that carry outsize risks.

To critics, the push into aggressive trading is like doubling down at a casino to recoup earlier losses.

"It would be a terrible tragedy if people try to recover from the devastation of the financial crisis by creating even more devastation in their personal investment accounts by taking on risks they don't understand and can't afford," said Barbara Roper, director of investor protection for the Consumer Federation of America.

Financial experts have long preached portfolio diversification, caution and patience when it comes to long-term investing. Still, some individuals feel they have no choice but to take matters into their own hands.

Two bear markets — following the bursting of the Internet boom in 2000 and the housing bubble two years ago — have decimated portfolios and left many people poorer than they were a decade ago. Some have grown disillusioned with losses incurred by mutual funds and stockbrokers and figure they can't do any worse on their own by darting in and out based on market conditions.

"The equity markets have not been steady long-term gainers for a long time now," said Nicholas Colas, market strategist at BNY ConvergEx Group, a New York brokerage. "There is a growing sense of frustration and (investors feel that) if you do want to play in equities you have to have a shorter time frame."

Susan York, of Naples, Fla., was fed up with the dismal performance of her 401(k) retirement account, saying that "buying and holding was just not working out."

Then her husband saw a Sunday-morning infomercial in January touting the benefits of trading options, which give an investor the right to buy or sell stocks and other securities at predetermined prices.

York had limited investment knowledge but attended several seminars before starting to trade in May. So far, York said, she's up an average of 40 percent a month and is trading full time.

"It's the best job I've ever had, not just for the enjoyment, but from the compensation standpoint," said York, who previously sold telecom equipment. "I've replaced a significant six-figure income."

Trading activity at online brokerages jumped in the second quarter as the stock market began rebounding in early March from its deep sell-off. Compared with a year earlier, activity was up 28 percent at E-Trade and 36 percent at TD Ameritrade.

Frenetic trading also is rising among Wall Street professionals.

So-called high-frequency trading, which involves souped-up computers trading stocks in milliseconds, makes up at least half of total trading volume, according to some estimates.

Among individuals, activity is picking up in some risky areas. Currency trading by so-called retail investors, for example, is expected to jump to $125 billion a day this year from $100 billion last year, according to Aite Group, a research outfit.

It has risen steadily from $10 billion in 2001.

Some individuals recently have jumped into one of the newest and riskiest investment products known as leveraged ETFs (see related column by Chuck Jaffe inside this section). An ETF, or exchange-traded fund, is a mutual fund that trades like a stock and can be bought and sold continually throughout the day. A leveraged ETF is like a regular fund on steroids. It gives two to three times the return of an underlying stock index.

But in some cases, critics say, the funds have suffered sharp, unexpected losses.