In this article, we will focus on helping you choose whether or not to do your own investing (also known as Do-It-Yourself, or DIY investing). While this option certainly gives you the most freedom to control your money, it also encumbers you with a fair amount of responsibility to ensure that you make the right decisions. Not for the faint-hearted, being the sole captain of your portfolio can take you into some choppy waters. However, it can also be highly rewarding - both emotionally and monetarily.
The good (pros)
Ultimate control: You’ll have complete personal responsibility for each decision. No one will talk you into or out of an investment decision, and you can buy and sell at your whim, at your convenience, in your underwear - whatever works for you. You’ll have no one to blame for those less-than-ideal trades, but you’ll get all the kudos for a good call.
You don’t need to trust someone with your money: Finding an advisor you can trust can be difficult, and your trust can always be betrayed. You don’t need to worry about this when doing your own investing. Besides, you’re pretty trustworthy, right?
“No one cares about my money as much as I do”: Ever get the sense that advisers either don’t have your best interests in mind, or that they simply don’t pay enough attention to your account? The simple truth is that many (but certainly not all) advisers in Canada are rewarded for sales activities, not investment expertise. It’s also well known that with all the forms of hidden compensation out there (the regulators are working hard to change this), it can be difficult to tell if an investment recommendation is based on what’s best for you, or what’s best for your advisor. It’s not surprising that many investors are choosing to manage their own money because they can pour in their own efforts, and hopefully improve results.
Save the cost of advisory fees: This is a big motivator for doing your own investing. The math shows that if you save the typical 1% per annum that a reasonably priced adviser might add to your investing bill, the lower returns compound over the years and end up being a fair size chunk of change (we should add that there are many unreasonably priced advisers that tack on far more than 1%). In the case of $200,000 invested over 20 years at an average 5% annual return, a 1% fee saved means a difference of over $92,000 in total portfolio value. This example of course assumes: 1) That you just buy investments and hold them for 20 years (without selling them in a panic one day), and; 2) That the investments you choose return an average of 5% per year. Generally speaking, that’s not how markets work. There are lots of ups and downs on the road to “average” long-term returns. That said, the math is sound enough that, if all things are equal, lower fees mean better performance.
It’s a hobby: It’s not for everyone, but many DIY investors genuinely enjoy the challenge of understanding what’s happening in the economy and making their own market calls. For these folks, investing is fun. It’s a way to keep the mind sharp (which is especially important for good health among those who are retired), and hopefully generate some income to cushion their retirement nest egg.
You might shoot the lights out: It’s certainly possible that you’ll rack up an impressive track record and perform better than you would have with an adviser. Mental accounting can make it hard to be honest with yourself about how you’re really doing, so be sure to track every investment, commission paid, gain, and (be honest) loss - in writing.
The bad (cons)
Time is money: Actually, it isn’t. Time is the one thing money cannot buy. Doing your own investing successfully (shouldn’t) be a piece of cake. Expect to spend plenty of time learning about how markets work, following politics and the economy, researching your investments, tracking your positions, and analysing your results. Among students at the Independent Investor Institute, we find successful DIY investors tend to spend a minimum of 10-20 hours per week on their portfolios. Time, like money, has an opportunity cost – you could otherwise spend the time with family, enjoying your favourite leisure activity, or staying active.
The emotional cost: Money is the biggest worry for most, and the biggest cause of tensions between couples. Not everyone is cut out for managing their own money. Here you really have to be honest with yourself – if the gyrations of the market mean you don’t sleep at night, you’re a perpetual grouch at the dinner table, or just don’t have enough “emotional bandwidth” left over for your spouse and family, consider those intangible costs. Stress is also linked to almost every physiological ailment, and that 1% you save actually isn’t worth much without your health. Also bear in mind that a small portion of investors have the same addictive relationship to market action as compulsive gamblers, so beware because the market can take your money as fast as any casino.
It’s low fee, not no fee: There are still plenty of costs involved in doing your own investing. The typical $9.95/trade is just the start. You need to know what you’re doing, so investing in some education and training makes sense before you stake your entire financial future on your investing savvy. Access to low-quality information may be free, but quality books, research subscriptions, and training courses do come with a cost.
One of the biggest costs unknown to most average investors is incurred using market orders, which is the main way you can buy and sell investments on your own. Market orders involve a counterparty that facilitates the transaction and skims a “bit off the top” for themselves for their troubles. Also watch out when buying mutual funds because many discount brokerages force you to buy the fund units which pay them the very same 1% adviser fee you’re working so hard to save. Stick with low-cost ETFs instead - advisor fee or not - because they carry far lower management expenses. Some discount brokers will even let you trade a selection of ETFs commission-free, which is perfect for smaller accounts which you contribute to frequently.
Have a back-up plan: Women live longer than men, but men tend to be the investment decision-makers in many households. Doing the math, this means your ship could find itself suddenly adrift in the event something happens to its captain. This is why we like to see both partners at the table whether working with an adviser or doing it themselves. One disadvantage to ditching the adviser (at least in theory) is that there’s no one to watch the radar and help out when the unexpected happens.
When cheap is expensive: While we’re being brutally honest, your results when investing on your own may not be very good. Mistakes in the markets can be very costly. Whatever your opinion is of investment advisors, they do spend more time on markets than you do. This means they’re likely more in-the-know, which could translate into better returns even if they serve many other clients. To drive home this point, here are three of the many, many woeful tales we’ve heard over the years:
Sebastian from BC:
“In January 2011, I opened an RRSP and TFSA account with Questrade. I lost 80% of my money and I don't feel like doing any investing on my own anymore.”
Larry from Saskatchewan:
“I am a retired businessmen that did fairly well in my 40 years in business. Sold out fall of 2008 and started losing my money under management at ***** Bank. I took over June 2009 and did OK but in April 2011 I took a big hit because of using a loaded margin account with no stop loss in place, and continued down from there. I have a fair income outside my investment fund accounts in real-estate holdings, so I was a little more aggressive with my liquid funds than I should have been. I needed to kill time waiting for my wife to retire and thought I'd try the market for a few years till she was ready. I only have three hundred thousand left after debts paid and need to smarten up fast or continue to lose my comfortable future. I think I may have blown it and may not be able to do the things we wanted to do in full retirement together.”
Harold in Ontario:
“My dear wife has suffered with the market meltdown and feels she cannot retire early, as she had hoped. She is under contract to work 4 days per week, though her employers have her working 5-6 days per week. This is unfortunate, as she is a cancer survivor, who works far too hard for her health. It pains me to see it.
She is 51 years old. In order to accelerate her retirement plans, one year ago we decided to forgo the inclusion of bonds in the portfolio in favour of an all-equity portfolio. The subsequent meltdown has frightened her into selling everything near the end of December (2008) and resolving to hold cash for now, never to again be invested only in equities. Though we had sat down in Oct 2007 to design this approach, I must take some blame for being a bit too persuasive. Needless to say, I have "tendered my resignation" as her chief financial advisor.”
With great freedom comes great responsibility
Ultimately, investing on your own brings a freedom of choice you wouldn’t otherwise have if you handed all your money over to someone else to manage. If you choose to do your own investing, we want you to remember three golden rules that will likely improve your experience:
1. Understand risk: Don’t let risk be another four letter word. Understand what you’re buying, and how much its value could drop in a worst-case scenario. Then make sure you’d be okay with that, or don’t make the investment at all. Pretending the worst can’t happen when it comes to investing is a losing strategy, because every so often, it does.
2. Understand diversification: Never put a large amount of your money in any single investment. Never put all your money in a single asset class (like all in stocks, or all in a high-interest saving account). Whether it’s the equity rollercoaster, wild commodity markets, changing interest rates, or inflation, your portfolio needs to be able to survive the unexpected, and that can only happen if you own a sufficient variety of investments that react differently to market events.
3. Get educated: You wouldn’t choose to defend yourself in court without having some knowledge of the law, and you wouldn’t try to perform your own surgery, so make sure you know what you’re doing before you start doing your own investing. If you’re already a DIY-er, don’t stop learning.
The upcoming article in this series will cover the pros and cons of choosing to have an advisor manage your money.
About Larry Berman
Larry Berman is best known to Canadians as the host of the top-rated TV show Berman’s Call on the Business News Network (BNN). After leading an impressive career with some of Canada’s largest financial institutions, Larry had seen enough of the dark side of the financial industry to know that Canadian investors had the deck stacked against them - saddled with the highest fees and lowest levels of financial literacy in the developed world, they needed help. This is why, in 2006, Larry left the corporate world behind to pursue his passion for helping people do better with their money.
Larry is now the co-founder of the Independent Investor Institute – which is dedicated to empowering self-directed investors through hands-on education, and ETF Capital Management, a boutique portfolio management firm for affluent investors who are looking for a highly customized and hands-off approach to investing. Larry also hosts free speaking tours across Canada throughout the year, and free beginner trading workshops through the Independent Investor Institute.