There is a close relationship between do-it-yourself and blew-it-yourself investing.
Vancouver financial adviser Ian Collings figures that between one-third and half of his new clients have been doing at least some investing on their own. In looking at their portfolios, he’s found several recurring mistakes that hurt their results.
“I see a lot of bad portfolios,” said Mr. Collings, a certified financial planner (CFP) who catalogued the blunders of do-it-yourselfers in a recent blog post. Advisers have since been distributing the list on Twitter for obvious reasons. If you’re hurting yourself as an investor, an adviser is one answer.
Another is to study common blunders so you can become a stronger self-directed investor. So let’s dig into some of the points highlighted by Mr. Collings:
1. Not realizing you lack the time, knowledge or self-confidence to invest for yourself.
“This to me is a big one,” he said. “I know of a number of people who opened an [online brokerage]account and left the money in cash because they don’t know what to do. Or, they do invest the portfolio and, as more cash creeps in, don’t didn’t know what to do with that additional amount. This is often a big catalyst for people calling me. They say, what do I do with this extra money?”
Money sitting in cash in a brokerage account typically earns zero interest these days, or a token amount at best. At volatile times like these for the stock markets, simply not losing money may look like a victory. But this view ignores the returns forgone because you didn’t use your money more productively. At very worst, you can earn in the area of 1.2 per cent by parking money in a virtually bullet-proof high rate savings account that you buy and sell like a mutual fund.
To be a successful do-it-yourself investor, you need time as well as knowledge and the confidence to apply it. Mr. Collings estimates it takes a few hours per month to tend a portfolio. People who ignore their portfolios forgo the opportunity to rebalance their holdings, which means making adjustments that get you back to your target mix of stocks and bonds. Portfolios that become overweighted in stocks because of a lack of rebalancing can be too risky, particularly for investors approaching retirement.
2. Half-hearted diversification, or worse
Let’s start with bonds. “I think do-it-yourself investors neglect bonds entirely in many cases,” Mr. Collings said.
Another problem is too much concentration in a few stocks, some of which are chosen using some fairly superficial criteria. “I’ve seen a number of people with large Apple holdings. People say, it’s a great company, Steve Jobs is brilliant, the whole bit.”
What Mr. Collings doesn’t see as much as he thinks he should are DIY investor portfolios with the diversification provided by exchange-traded funds or other types of fund products. A traditional style ETF tracks stock and bond indexes and thereby provides exposure to a wide variety of stocks or bonds.
Perhaps Mr. Collings’ Vancouver location is to blame for the preoccupation his new clients seem to have with real estate. “It’s hilarious,” he said. “They have their principal residence, they’ll have a rental property and then when it comes time to sit down and talk about their investments, what do they want? They want real estate-style investments in their RRSP.”
3. Focusing too much on stock trading commissions and not enough on other costs
Low trading costs are the main reason to invest for yourself. A few years ago, when stock trading commissions were commonly in the minimum $29 range, do-it-yourselfers paid about one-third the cost of people with advisers. Today, many brokers charge just under $10 if you have at least $50,000 in assets with the firm, and there are brokers charging as little as $4.95 a trade or $1 for 100 shares (that would be Questrade and Virtual Brokers, respectively).
It’s sometimes a mistake to think that a $9.95 trade costs only $9.95, Mr. Collings said. If you’ve buying a U.S. stock, foreign exchange charges will apply at rates that are highly profitable for brokerage firms. And, if you’re buying the shares of a company that doesn’t generate big trading volumes, you may have to pay a premium over the market price to have your trade completed.
The more you trade, the higher your total costs rise. Eventually, Mr. Collings warned, these costs could create as much a drag on your returns as the fees on mutual funds.
4. Making mistakes of inattention
When you’re trading stocks online, you need to be vigilant that you’re buying the right stock on the right stock exchange. Mr. Collings recounted a story told by a client who wanted to buy the iShares Gold Trust, which trades on the New York Stock Exchange under the symbol IAU. By mistake, he bought a penny mining stock called Intrepid Mines, which trades on the Toronto Stock Exchange under the same stock symbol.
This cautionary story actually has a happy ending. Intrepid Mines has delivered a gain of 500 per cent for Mr. Collings’ client.
5. Focusing on trading rather than on investing
Mr. Collings says he’s noticed an attitude among some DIY investors that they have to tend their portfolios on a day-by-day and even hour-by-hour basis. “People have said to me, ‘I don’t have as much time for investing any more because I can’t be logging into my account all the time, ready to make trades.’ People think they have to be engaged full time to find value in the market.”
If you’re a trader, then maybe so. But investors are best served by developing a plan, executing it and then doing only periodic checks to make sure everything is on track. There’s simply no need to check your portfolio every day.
“Some people feel they’re inadequate investors because they’re not watching BNN all the time,” Mr. Collings said. “To me, that’s sort of missing the point on what investing is all about – long-term diversified participation in capital markets.”
Here are some ways to park your money in relative safety and earn at least a small return while you decide what to buy:
You have $25,000 sitting uninvested in an online brokerage account
Expected return: zero (most firms require much higher balances before they pay a token amount of interest)
You use a high-interest savings account that trades like a mutual fund
Expected return: 1.2% (Renaissance High Interest Account, fund code ATL5000)
Hypothetical annual gain: $300
Risk factor: typically covered by deposit insurance
You use a short-term bond ETF
Expected return: 1.25%
(Claymore 1-5 Year Laddered Government Bond ETF, CLF-TSX)
Hypothetical annual gain: $312.50 (assumes this ETF's share price is flat)
Risk factor: Income paid is very low risk, but unit price could decline if rates rise.
You use a one-year GIC
Expected return: 1.75% (various small banks and trust companies)
Risk factor: typically covered by deposit insurance
Hypothetical annual gain: $437.50