Think you've got what it takes to be a self-directed investor?
Before you take the plunge and open an online trading account, it's a good idea to take a hard look at yourself in the mirror. By making an honest assessment of your strengths and weaknesses, you'll have a better idea of whether managing your own money is for you, or whether you'd be better off hiring a pro.
John De Goey, a certified financial planner and investment adviser with Burgeonvest Bick Securities in Toronto, sees both kinds of people. He estimates that 25 to 35 per cent of investors have the necessary qualities to be successful going it alone.
What are those qualities?
"The big three are time, temperament and training, but by far the most important element is temperament," he says.
If you're the sort of person who is upset by even small losses, then having an adviser to hold your hand through bouts of market turbulence may be preferable. Similarly, if you tend to catastrophize - that is, when markets are tumbling you imagine the world is about to end - then managing your own money could be problematic because you'll be tempted to sell at the worst possible time.
The same goes for an investor who is overly optimistic or impulsive. If your pulse quickens when you're looking at the chart of a stock that has already doubled or tripled in price, you may need someone to talk you down from what could turn out to be an ill-timed purchase.
On the other hand, if you can watch your account drop in value without suffering a panic attack, and if you can keep your eyes firmly focused on the long term rather than going after the quick score, then self-directed trading may be for you.
Keeping your emotions under control is one of the hardest parts about being an investor, says William Bernstein, author of The Investor's Manifesto: Preparing for Prosperity, Armageddon and Everything in Between.
"Nothing is more likely to make you poor than your own emotions. Nothing is more likely to save your finances than learning how to use cool, dispassionate reason to hold these emotions in check," he says.
"In my experience it is the ability to ignore these dysfunctional instinctive responses that determines, as much as anything else, which investors wind up with the highest returns."
Having nerves of steel isn't the only prerequisite. Before you pull the trigger on that first trade, you also need to ask yourself whether you have the time and the training to be a successful do-it-yourself investor.
To get the proper training, Mr. De Goey says investing books are an ideal place to start. The trick to successful investing isn't to trade in and out for a quick profit, but rather to build a diversified portfolio that will grow over time. To that end, books that provide a broad, long-term perspective of markets and investing are your most valuable resource, he says.
His favourite books include John Bogle's The Little Book of Common Sense Investing, Charles Ellis's Winning the Loser's Game and Nassim Nicholas Taleb's Fooled by Randomness.
Once you've got a grounding in basic investing concepts, how much time does self-directed investing take? Not as much as you might think.
Garth Rustand, executive director of the Vancouver-based Investors-Aid Co-operative of Canada, says the best investors tune out the noise of day-to-day market fluctuations and resist the urge to switch their holdings based on the latest media story or brokerage recommendation.
Instead, they build a diversified portfolio of equities and fixed-income securities and let time and compounding do the heavy lifting. Mr. Rustand is a big fan of indexing - using low-cost mutual funds or exchange-traded funds that track broad indexes of stocks or bonds.
His book, The Investors-Aid Guide to Protecting Investment Returns, shows investors how to build a portfolio to match their risk tolerance and investment goals, whether they're seeking capital preservation, income, growth or a combination.
Once the portfolio is established, very little additional work is required. The investor should check the portfolio every six months or so and tweak the holdings, if necessary. For instance, if the stock market has soared, the investor would trim his or her equity positions and buy more fixed-income securities to bring the asset allocation back into the predetermined targets.
Buying index ETFs or mutual funds allows investors to sleep at night, because they don't have to worry that an individual stock or bond will blow up and destroy a chunk of their savings. That's why indexing, rather than stock-picking, is the preferable strategy for most self-directed investors, he says.
"It reduces the tendency to over-manage and watch. Watching your portfolio is one of the worst things you can do," he says. "It never rises as quickly as you think it will and every little glitch gives you difficulty."
Need help, or go it alone?
38% - Proportion of high-net-worth investors who believe advisers "provide no better information or advice than can be found on the Internet for free"
16% - Share of high-net-worth investors who use an online trading account exclusively when buying or selling stocks, bonds, mutual funds or exchange-traded funds
48% - Proportion of high-net-worth investors who use both an online trading account and an adviser, planner or broker for making investment transactions
36% - Share of high-net-worth investors who use an adviser, planner or broker exclusively
Source: BlackRock Inc. Based on a survey of 500 Canadian investors with financial assets of more than $500,000
John Heinzl