Money may be the biggest taboo of all. When you think about it, how many people truly know your salary? How many people know the extent of your debts or investments? We don’t talk about money; it’s more taboo than sex sometimes.
I guess this is why we have such a hard time finding a good financial advisor. A person that we would open our wallet in front of and let them know about all our money secrets. In addition to this, there are questionable found advisors out there offering poor financial advice. Also, there is always the notion of high costs that has tainted the reputation of mutual funds. Plus, you don’t really know in what you are investing and sometimes why you chose it. You have to “trust the guy”. I guess for all these reasons, many decide to become DIY Investors.
With the arrival of ETFs several years ago, many people have found their way through DIY investing. Now that the market is high and has been back on track for a few years, many investors are getting good results and think they could manage their own portfolios. Is it a good or bad thing? It clearly depends on which kind of investor you are.
The Benefits of Becoming a DIY Investor
As a DIY investor myself, I see several benefits of managing my own portfolio. The first one for me is being in control of my investments. When I make a good trade, I’m proud of myself and I like making money on the stock market. I can invest according to my opinions and macroeconomic views. If I believe the US stock market will outperform the CDN market in 2014 for example, I can rapidly move my money towards more US stocks. This is something you can’t do when you invest with a broker or in mutual funds.
The second reason why I invest by myself is because the fees are much lower. Overall, it probably costs me around 0.50% annually in transaction fees to manage my account. This is better than any mutual fund on the market and can compete with most ETFs (since you still have to consider the transaction cost on top of the low MER).
Since I’m passionate about investing, I don’t really count the hours to manage my portfolio. I love reading financial news and looking at a financial statement once in a while. Plus, with dividend investing, it doesn’t require much time to control my asset allocation. Most stocks I own are fairly stable and only require a quarterly spot check to make sure they are still in line with my investing strategies.
The Reality Check – It’s Not All That Great!
Unfortunately, being a DIY investor is not always a great idea. If you don’t have a strong financial background and you intend on trading based on what you read in the newspaper; you may soon be disappointed! And even if you are very knowledgeable, you can still hit a wall. I’m pretty good at managing my portfolio but I’ve also made a few near fatal mistakes. I tried to catch a falling knife when I bought BBRY (formerly known as RIM) and I didn’t sell when it was time and cashed out an important loss with 5NPlus (VNP). Imagine that I was once +50% on this investment before selling it at… -80%! At least, I’m not nervous about the market!
I guess the biggest mistake DIY investors make is trying to time the market. When you invest with a broker or in mutual funds, it is very rare that your asset allocation will go from fully invested to cash. However, we see this often with DIY investors. They try to time the market and sell when it’s high and find the sweet spot to enter again. This strategy could work, but most investors leave more money on the table then they avoid losses. The reason is simple; nobody knows when the market is too high or the market is too low. I’ve been discussing with several investors since buying this blog and each year, some of them tell me the market is too high and will eventually crash. I’ve read this in 2011, 2012 and 2013.
Well, if I had listened to them, I would have left a lot of money on the table as the easy money was there and ripe for the picking. And now, if you are still sitting on cash, what do you do? You are stuck with the same question again with no answer. The market is evaluated at a fair price, some people say it’s expensive. What if the market gains another 10% this year? What will you do? And even if you are right and the market goes down by 10%. Will 10% be enough to enter or do we have to wait it’s down 15% or 20%? What if you have to wait for 35% like 2008? What’s the answer? How do you find out? You wait until it goes back up? This seems like a lot of time on the sidelines while you could have been cashing in some healthy dividends!
All this to say most DIY investors don’t beat the market, they don’t beat mutual funds and often lose money. Think about it, how can you be sitting in your living room by your computer with a coffee and manage your portfolio with less than 2 hours a week. Much less beat a team of 10 professional fund managers working all week on their portfolios?
But then again, we do it because we love it. And there is not much to add to that, right? I’m in the same boat as you, so I know how you feel about giving your money away to an advisor. But sometimes it’s still the best thing to do.
Where Can You Start as a DIY Investor
Before looking at any products or investment newsletters, I think the best place to start as a DIY investor is by asking yourself simple questions:
#1 Are you committed to draft your own investing strategy?
#2 Are you committed to applying and following your investing strategy?
#3 Are you willing to research stocks and not simply read the sensational headlines?
#4 Are you interested in macroeconomics, financial statements and ratios?
#5 Do you have enough time to manage your portfolio?
#6 Do you have a financial background?
If you answer “no” to any of those 6 questions, maybe it’s not the right time to start managing your own portfolio. It is not that easy and don’t make the mistake of looking at 2013 returns. The real good investors are able to bring investment returns to the table over 5, 10, 15 years. In 2013, a monkey sitting in front of a computer could have made money; this is not a good starting point if you wonder if you are good with your investments.
Once you are ready to start your journey as a DIY investor, I think the starting point is to read from different sources. Take the time to draft your own investing strategy, know why you invest in one stock instead of another. Then, you can open your account and have fun investing!
Readers, can you tell me why you have decided to become a DIY Investor? How is it going for you?
Thats a good article. I am a DIY investor because I know that I am the person who is in charge of my own financial destiny. Therefore, I have the most motivation to succeed. I also hate paying fees for mutual funds, advisors etc
A good read.
I’m a DIY investor because I’m passionate about it. I also figure nobody will care more than me, how and where I save and invest my money.
Based on my approach, I hope to cross $9,000 in dividend income this year, in my non-reg. and TFSAs. RRSPs I will be need to cash out eventually, but hoping to save and invest and make those accounts close to $1 M before I retire.
If people are still sitting on cash, I say invest. Sure, wait if you want to get into the market, but I figure the more time out of it, the worse off you are. The best time to buy is when the market is low, sure, we are all know that. The second best time to buy is now. Get your money working for you as soon as you can so it’s doing the work and not you 🙂
Mark
I think there are many benefits to being a DIY investor. DIYers should be paying lower fees and have the potential to outperform index and mutual funds.
I’m a DIY investor because I have a passion for investing. Also, I like being in charge of my own financial future, no one to blame but myself if my investments perform poorly but I also get all the credit when things go great!
I think the biggest key to being a DIY investor is crafting a strategy with rules that you will follow religously. It is when we stray from our investing rules that we often make the money losing mistakes!