The pros and cons of investing for yourself
Do-it-yourself or DIY investing has taken off over the past two decades. Online brokers have opened up a whole new world, allowing ordinary people to gain access to the stock market without having to get assistance from a stock broker or financial advisor. I think it’s been a fantastic development, a democratization of the stock market. But there have been negative consequences for investors who’ve jumped in without the right knowledge or information. So what you can expect if you want to be a DIY investor and manage your own money?
If you have even a mild interest in investing and don’t mind spending some time on it, learning how to invest for yourself has big payoffs: you’ll pay lower fees, have a better understanding of what you own, and you’ll be more in control of your investments.
But investing for yourself isn’t for everyone and it has its downsides; the primary roadblock is that you receive no help or advice. You’ll need to do some learning, make your own decisions and have the discipline to stick to your investment process. You’ll also need to spend some time monitoring your portfolio a few times a year.
What's involved with DIY investing?
First, you will need to choose an online broker. There are lots of options in Canada like Questtrade, Qtrade, WealthSimple and the brokerage arms of all the banks, like TD Direct Investing and CIBC Investor’s Edge. These are all online brokers so you’ll be placing your trades online through their website or through an app. You’ll have to learn the platform: where to find ticker symbols, how to place trades, and how to move your money around. You’ll be able to move money between accounts, make contributions to your RRSP and TFSA, see all the details of how your investments are performing, and what income you’ve received from them. All brokers provide tools to help you, like tutorials about investing, updates on the economy and markets, and even research on individual stocks. At tax time, you’ll need to download the tax documents and make sure you have all of what you need to file your tax return.
The many decisions you'll have to make
As a DIY investor, you’re making all of the decisions: what to buy, when to buy, and how much you should be contributing to which account. It’s up to you to figure out what’s best for you. Here are some decisions you’ll have to make that a financial advisor would normally help you with:
How much you should contribute to your RRSP and TFSA, being sure not to go over your contribution limit. If you exceed your contribution limit, you’ll pay penalties. Also, using an RRSP doesn’t make sense for everyone so you’ll need to determine whether it’s right for you.
How to allocate your money between cash, fixed income investments, and stocks. This is a function of your investment time horizon and your tolerance for risk. A financial advisor would be able to give you a breakdown but you can find example of asset allocation choices online and it’s actually really not difficult to do.
What investments to buy: mutual funds? Stocks? ETFs? GICs? Which ones specifically? My approach is to keep it simple by owning just 3-5 broad-market ETFs so actually the choice can be simple. But you need to learn a little and feel confident in your choices.
If the market goes down (and down and down), what should you do? A good financial advisor will talk you through the volatility and help you stay invested to ride out the downturn. DIY investors can get cold feet and logon to their online broker and start selling. This might be done in a moment of panic, and without the barrier of having to call your advisor and ask them to liquidate your holdings, you might make a mistake and sell when you should just hold on.
For some people, these decisions aren’t hard to make, while for others they feel overwhelming. What kind of investor are you? Are you willing to figure out the answers? Although you can get help with some of these questions by using a financial planner or coach, they cannot tell you what investments to buy.
One way to learn is to take an online “Learn to DIY” course. There are several available now in Canada. Or, you can work with someone like me who teaches individuals what they need to know to invest for themselves using exchange-traded funds (ETFs).
Another tool is to look at model portfolios. They are portfolio suggestions available online from some pretty good sources. Once you choose the right level of risk for you, you can simply copy one of these model portfolios. One example is Canadian Couch Potato - you can check out their model portfolios here. Be careful who you’re following, though – not all model portfolios are good.
DIY investing can be harder as you age
The last important caveat with DIY investing that I will mention is this: at some point you’re going to get older, and often as people age, their confidence in looking after their own investments starts to wane. It might be a lack of interest, cognitive decline, or other limitations like reduced eyesight. At this point, having a financial advisor might be really important. In addition to watching over your investments, they can also help you make other decisions like whether you should take an additional RRIF withdrawal to reduce your taxes later in life.
The big payoff is lower fees
With all of these challenges, why would you choose to DIY invest? The main reason is fees. Working with a financial advisor can cost you 1%-2% or more every year. That’s 1%-2% of the money you have invested with an advisor. With DIY investing, you can build a good portfolio for 0.10% to 0.20% per year. Over long time periods, this makes a huge difference. To demonstrate the impact, let’s assume you start with no money in your TFSA. Every year you add $5,000 and invest it. If you are paying 2% in fees (using a financial advisor who sells you mutual funds), you could end up with $189,400 after 20 years. Pretty good! But doing it yourself, you could have $234,700 – that’s $45,000 more.* Fees matter.
The other reason to DIY invest? It’s kind of fun. It’s empowering to choose your own investments and watch how they perform over time. Yes, you get performance reports from your financial advisor once a month or once a quarter, but with DIY investing you can log on anytime to see how an economic or political event impacts your investments. It’s interesting, if you’re into that kind of thing. The downside is that you can become obsessed and check every day or even multiple times a day, which is not good for your stress level, especially when markets are going down.
DIY investing is one of the four main methods of getting invested in the market and is the most hands-on and the least expensive. To read more about using your bank branch or a financial advisor, have a look at my prior posts here and here. In my next blog post, I’ll explain what you can expect from a robo-advisor.
With so many ways to get invested, there’s bound to be a route that works for you. It will take a little time and effort no matter which route you choose, but getting your savings working for you will be well worth the effort.
*Assumes an 8% average annual return, 2% fees using an advisor and 0.12% fees for DIY.