By Steve Bridge, B.A. (Hons.), CFP®
Investing is one of the most popular personal finance topics out there. And why shouldn’t it be? Bitcoin! Tesla! NFTs! Buy! Sell! Hot stock tips! These are so much more exciting than budgeting, taxes and insurance. And investing is a great water cooler or dinner party topic; lots of people have success stories of their aunt or brother-in-law who bought Apple or Amazon or weed stocks when they were at bargain basement prices. It sounds so easy, but the reality is a different story. Successful do-it-yourself (DIY) investing requires a combination of technical savvy, behavioural discipline, and a broad range of related knowledge.
For the record, investing is never the first thing I work on with my clients. The investment part of a financial plan is like the last four pieces of a 500-piece jigsaw puzzle – once everything else is in place (goals, cash flow, retirement planning, tax planning), the investment strategy (asset allocation, implementation, etc.) is pretty straightforward.
There are two main types of DIY investors out there. The first type (stock pickers) picks and chooses individual securities/companies, and the second type (indexers) holds index funds (funds that track stock and bond indexes like the S&P 500 or the Toronto Stock Exchange). Within each of these there are two subgroups – one that actively buys and sells their holdings and the other that ‘buys and holds’, rebalancing to their target asset allocation (stocks, bonds, cash) once or twice a year.
All types of DIYers need to:
- Determine the appropriate asset allocation for their personal circumstances
- Be technically savvy enough to open a self-directed brokerage account and to place a trade (understanding market orders, limit orders, ticker symbols, etc.)
- Have a good understanding of investment risk and be able to objectively – without bias – assess the risk of any current or proposed investment holding, and of the overall portfolio.
- Understand how much should go into each account (RRSP, TFSA, non-registered, corporate) to minimize tax over the short and long-term
- Have the time, interest, and energy to devote to investing
- Have the discipline to rebalance their portfolio once or twice a year or when investments deviate from their target allocation (which may involve selling winners and buying losers)
- Have the temperament to not sell (and if possible, buy) during market drops. The 2008/2009 crash and subsequent withdrawals proved the vast majority of investors struggle with this.
- In retirement, determine how best to create a steady stream of income from their various investment accounts (the decumulation phase). An advice-only planner can provide serious value here.
The best investors:
- Keep it simple. Investing does not have to be complicated.
- Keep their fees low (see below)
- Resist the urge to tinker or ‘play’ with their investments. As Warren Buffett said, “Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.” Another one of my favourite quotes is : “An investment portfolio is like a bar of soap: The more you touch it, the smaller it gets”.
- As confident as one might be about a particular investment, everyone gets it wrong sometimes. Don’t put all your eggs in one basket.
That sounds like a lot of work! What are the advantages to all of this?
- You have control over your money. No one cares more about your money than you do and managing it yourself means you know what is invested where… and most importantly, why.
- Potentially lower fees. The compounding effect of investment fees can be devastating over the long-term and are one of the most important things to pay attention to when it comes to investing. Because the effects of high fees aren’t obvious, you may never know that you could have retired a few years earlier, spent more money during your retirement, or left thousands more to your kids or other beneficiaries. Choosing a low-cost diversified index portfolio can be done for a 0.25% fee (also known as the Management Expense Ratio or MER), which is much lower than it could be when compared to having someone else managing your money.
As you can see, there is a lot that goes into being a DIY investor. There are not only the technical and behavioural aspects of investing, but the planning part as well. Investing with no plan just for the sake of investing is putting the cart before the horse. An end goal and a proper financial plan need to be in place first in order to implement the optimal investment plan.
A few of the questions that need to be answered prior to investing include:
- Why are you investing (what is/are your goal(s))?
- What is your time horizon?
- What is your starting point?
- How much do you need to invest?
- What are your assumptions regarding future investment returns, and are they realistic?
- If you are investing for retirement, as most people are, what is your target annual spending in retirement, and what are your projected sources of income in retirement?
Whether you are investing on your own or not, make sure you have the answers to these questions first, as doing so will greatly increase your chances of ending up where you want to.
What do you think? Are you a DIYer or thinking of becoming one? Let us know in the comments below!