With Canadian mutual fund fees amongst the highest in the world according to a 2015 Morningstar Global Fund Survey, and online discount brokerage accounts becoming easier and cheaper to use every year, a savvy investor might want to think about finally making the leap and directly controlling their own investments.
While it used to be fairly expensive to buy and sell stocks, bonds, and ETFs online, the decreasing commissions and fees charged by brokerages now represent far less of a drag on your overall portfolio. Keeping more money compounding for you inside of your RRSP, TFSA, or non-registered accounts is obviously much preferred to seeing it trickle out in a steady series of $29 payment dribs and drabs.
However, for many Canadians, opening up their own online discount brokerage account and then buying and selling 3- or 4-letter ticker symbols can still look like a big scary obstacle relative to simply sending a monthly amount to their mutual fund manager.
The truth is that we aren’t necessarily wrong to have cautionary instincts when looking at DIY investing. Some of us just aren’t built to handle our own investments, and still more just don’t want to put in the needed time and effort – even if it means sacrificing some investment returns and management fees.
That’s ok – there is no one-size-fits-all solution when it comes to handling our money! That being said, if you’re ready to roll up your sleeves and control your own destiny, here are a few questions that you should ask yourself before you start trying to re-enact your favourite scenes from Wolf of Wall Street.
1) Are you comfortable completing some time-consuming, but not terribly complicated paperwork?
Setting up a discount brokerage account takes some time, as you may need to become familiar with several of the terms being discussed in the agreements you’ll need to sign in order to manage your money online.
This might sound like a small thing, but I’ve seen tons of people do dozens of hours of reading only to get tripped up by this paperwork obstacle.
2) Is math your thing?
Depending on what investment strategy you use (see below) more or less math can be required. You don’t need to be a rocket scientist to invest, but you do need to be comfortable with percentages, reading the occasional graph, and understanding investment articles that can be somewhat number-heavy.
If this doesn’t describe you, perhaps a robo advisor or other type of investment platform might be a better move.
3) Are you honest about yourself and your emotional responses to money?
One of the biggest threats to a person’s DIY investment portfolio is allowing emotion to slowly creep in and dominate their decision-making. It’s fairly common for a beginning investor to setup a rational, elaborate investment strategy, and then toss it all to the wind when the market drops 20% in a month, or their buddy gives them a “hot stock tip” that they heard on an investment show the night before.
If the thought of losing 40-50% of your stock portfolio within the space of a few months gives you intense anxiety, then you need to understand this about yourself and plan your investment strategy accordingly. Be aware that gauging your own risk tolerance is quite difficult to do, and many people believe they’ll be able to see their strategy through to the end, only to log into their online trading account and let emotion take over at the worst times.
4) Would you describe yourself as a curious person that likes to read and do research?
Again, depending on what investment strategy you choose, (see below) the amount of reading and research needed will vary massively. Reading a couple of books and/or online sources to get a feel for basic index investing is a whole different ball game from the daily analysis required to keep track of dozens of individual companies, their management teams, stock movements, analyst predictions, etc.
If you quickly grow bored with charts, quarterly reports and the like, then you may want to cross off several types of time-intensive online investing strategies.
5) Do you have a high comfort level with online banking and online platforms?
Perhaps you’re an online wizard with any type of device. Maybe you’ve been doing online banking for years, forgot what a chequebook looks like, and only handle paper money a few times a month.
Or maybe not.
If you get anxious when you send money to friends online, pay bills, or transfer cash around, then DIY online investing might not be a great experience for you. It also helps if you’re used to using online platforms and generally can navigate different types of websites fairly easily.
Passive vs Active Online Investing
Before you make a final decision on if you’re ready for DIY online investing you should really do a little reading on the difference between active investing (aka stock picking) and passive investing (aka index investing, couch potato investing) investment options. While many people are probably capable of executing passive investing strategies that rely predominantly on managing 2-5 broad market ETFs, it is much more challenging to manage a stock/bond portfolio of 10-50 companies.
If you want to open a discount brokerage account, buy 2-5 plain vanilla index ETFs, and then mechanically rebalance those amounts 1-4 times per year, that is obviously going to require a lot less time and effort than constantly deciding when to buy and sell individual stocks. If you think that active investing is for you, perhaps joining an investment club, doing some substantial reading on company/valuation analysis, and signing up for some investment newsletters will give you a good idea on what next steps you should take.
The key thing to remember when trying to decide if DIY online investing is right for you is to be honest with yourself. Don’t get dazzled by stories of people getting rich quick by investing in a few stocks. It’s much less expensive to find out that DIY investing isn’t a great fit before you start buying and selling!
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