Are You Equipped to Be a DIY Investor?
There is a lot to be said in favour of Do-It-Yourself (DIY) investing. The barriers (online access, real-time quotes, lower costs, etc.) have come down dramatically in recent years. Simultaneously, I would argue, the fact that there are fewer barriers means that the DIYer has been given more freedom to seriously mess up their finances. In this blog post, I will look at some of the indicators, for and against, that a person might be a good candidate for DIY investing.
“Financial literacy includes the skills and capacity to make informed financial decisions, as well as actions or behaviours that lead to positive financial outcomes” Financial Consumer Agency of Canada. As it applies to investing, financial literacy includes understanding that:
- diversifying your investments is safer than buying a handful of stocks;
- inflation can undermine the purchasing power of your money;
- compound interest works for you when you are saving but against you when you are borrowing;
- different account types have different tax treatments; and
- different assets can have different tax treatments, depending on the account.
There are other aspects of investing that a DIYer should also be aware of. In particular, I think about corporate actions like stock splits and spinoffs which can create changes in your holdings regardless of your intentions or desires. Dividends can also be confusing because of terms like ex-dividend date, record date, and pay date. Plus, of course, there is the perception that dividends are somehow a form of free money.
Furthermore, if you have maximized your contributions to Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), you will probably have to deal with various forms of taxable income every year in your non-registered accounts.
I’ll also add that most online brokerages allow you to invest using US dollars to buy US-domiciled investments. This adds an additional challenge concerning taxation as well as potential estate issues.
A DIY investor is fully responsible for the investment decisions made. You may be able to get through to an investment representative at your online brokerage, but they are restricted from offering advice on whether to buy or sell any specific investment products. Depending on the type of investing you want to do, especially if you intend to buy individual stocks and bonds, you will need to do ongoing research and closely monitor your portfolio. This is a challenge if work and personal commitments do not allow you the time you need to research possible investment opportunities.
A professional financial planner should work with you to help you discern the goals and purposes for your investments and the various time horizons. For example, a Registered Education Savings Plan (RESP) could be exhausted by the time your youngest child turns 22. Registered Retirement Savings Plans (RRSPs), later transferred into Registered Retirement Income Funds (RRIFs), may well be intended to last until the end of your life or the life of your spouse. Furthermore, depending on your financial circumstances, you may decide to invest in a Tax-Free Savings Account (TFSA) but leave it untouched until after your death as an inheritance vehicle. Each of these account types might, therefore, have a different asset allocation to match those time horizons.
If you can think through those purposes and invest accordingly, that can be a powerful affirmation of your ability to invest on your own. If, on the other hand, you are drawn to the siren call of “hitting one out of the park,” of “getting rich quick” by choosing a single high-flying stock, day-trading, trading options or cryptocurrencies, and that has been your repeated behaviour when investing on your own, you may want to reconsider your inclination to invest without professional advice.
Investing and Your Emotions
“Don’t just stand there; do something!” We humans have a bias for action and that applies to investing as much as elsewhere in life. We make impulsive emotion-based decisions all the time. However, when it comes to investing, probably the best decision you can make is to keep your emotions in check and leave things alone. A study of the data obtained from a large discount brokerage (names redacted) by Terrance Odean, professor at the University of California Berkeley’s Haas School of Business, found that the account holders with the highest frequency of trades had the worst results. Making investing decisions based on short-term market fluctuations likely means that the DIY approach is not suitable for you.
On the other hand, if you can find a system of investing that automates the process and lets you “set it and forget it,” then you may be able to avoid the emotional traps that DIY investors tend to fall into. Although everyone touts the advantages of Exchange-Traded Funds (ETFs) one of the downsides is that although you can set up automatic contributions to an account, you typically cannot set up automatic purchases of an ETF. This is where traditional open-ended mutual funds have an advantage, if you can find one that charges low fees (there are a few out there), since they typically allow systematic investment plans to be set up.
The Complexity of Your Finances
The “average” Canadian investor who receives only employment income, does not operate a small business or own multiple rental properties and does not have complex tax or estate issues to consider, may be a very suitable candidate for DIY investing. However, if you have sufficient income to maximize your RRSPs and TFSAs, meaning you are investing in non-registered accounts and, therefore, need to pay additional attention to tax matters, and also have to balance assets like a business, a cottage, a permanent insurance policy, and your other investments in your estate plans, then you may want to engage an office that can fully attend to those matters.
Your Age and Your Marital Status
As we get older, our energy and our mental acuity diminish. If we have very straightforward investments that require little maintenance, this may not be much of an issue until quite a bit later in life. And, of course, there are individual differences where some can manage investments into their 80s while others are either unwilling or unable to manage their investments much past age 65. A single person would do well to carefully consider their capacity to manage their investments on their own after a certain age.
And then there are issues associated with managing investments between spouses or common-law partners. Often, unless the couple keeps their finances almost completely separate, one partner takes on the bulk of the investment decisions. That often means that the other spouse, no matter how intelligent or skilled in other domains, is less familiar with the management of their investments. At a certain point, despite continuing to have adequate skills to manage their investments, it may be wise to consider giving up that DIY role and go searching – together – for someone who can provide comprehensive financial planning services until the death of the last surviving partner.
The bottom-line answer to the question asked in this blog post is to know yourself. Recognize your capacities and your limitations. If you keep on losing money when the investment markets in general are going up, you may want to question your ability to manage your investments on your own. If you are older, periodically assess yourself, too. What you once were able to accomplish with ease and speed will eventually become more difficult. Check in with someone, adult children, trusted friends, or your family doctor, for example, to see whether you still have what it takes to manage your investments.
It is often said, in favour of DIY investing, that no one cares more about your investments than you do, but if you don’t know how to care for your investments, it may be appropriate to have someone else manage them for you.
This is the 221st blog post for Russ Writes, first published on 2023-10-30
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.