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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.

# posted by Medical Information : 11:19 PM