I don’t generally recommend do-it-yourself investing because the return on investment is almost always below the market rate of return. That said, it might well be right for you. Here are the fundamentals you need to know.
Make sure it’s right for you
There’s a massive surge in DIY investing that we can chalk up to so many Canadians spending more time at home, and having accumulated savings during the pandemic lockdowns; frustration with high investment fees (DIY is a fraction of the cost); and a red-hot stock market from mid-2020 through to the end of 2021. With the volatility in 2022, the opportunity to “value invest” — kind of like buying stocks on sale/discount — has further enticed DIYers. Technology has levelled the playing field with access to real-time news and securities statistics, making it possible to invest with ease.
Research shows that to be successful, you’ll need:
- A clear strategy
- To be comfortable with numbers and analysis
- The ability to remove emotions from your investing decisions
- A reasonably high level of market knowledge
- A passion for the craft of investing
- Time to spend on the above points
Without these elements in place, it’s extremely hard to achieve optimal returns. So, have a heart-to-heart with yourself before you jump in.
Practise with a mock account
Mock accounts can be set up with most self-directing investing companies for free. You use fake money, usually $100,000, on their trading platform to “invest” in stocks, funds or ETFs (exchange traded funds), sometimes even crypto, and track your performance and analyze the investments you may be interested in adding to or removing from your real portfolio. For the best results, complement your practice trading with books, articles and courses to help sharpen your knowledge about various investing techniques.
Establish a “play” account
Retirement is too important to put all your RRSP, LIRA and TFSA money at risk, especially if you’re new-ish to DIY investing. When you’re ready, set up an account and invest in what you want with money you would be comfortable losing.
Play with this account. Learn to do basic financial analysis (should be rooted in the numbers, by the way, and not speculation). Start to develop your own strategy or align with a well-known strategy such as “couch potato” (ETFs), “dividend growth” (stocks that pay the highest dividends), “emerging markets” (investments in new tech, growing sectors or countries). These are not recommendations! Learn to calculate your rate of return on your total portfolio, not just the individual stocks, funds or ETFs you buy. You need to see the complete picture to know if your strategy is working. If it is, you can slowly add more funds.
Still, leverage your accountant and/or financial advisor
It can be extremely helpful to stay close to your advisors while you’re DIYing. They’ll be able to weigh in on market assessments and tax implications with your investments and raise any red flags about your strategy. More information from qualified professionals is better, and can help you round out your strategy.
One of Warren Buffett’s most famous sayings is “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. l.” No one has a crystal ball showing where this wild market is heading. So, exercise some caution, keep yourself informed, and set personal limits such as how much return you’re willing to accept, or what you’re willing to lose, before getting out.