It wasn't long ago that the average online trader was young, male and aiming to make a quick profit trading stocks. But due to a wealth of new investment products and online tools, today's online investor is just as likely to be a 30-something professional woman saving for her first home, or a 60-year-old retiree devoting some of his newly found free time to managing his retirement portfolio.
"The perception used to be that online (firms) were a great place for stock trading," says Jason Storsley, president and CEO of RBC Direct Investing. "I think that will always be true, but the online investing space has evolved alongside the needs of its clients. More and more investors are seeing it as a great place for long-term investing."
Part of the growing appeal is the breadth of investing products available online. Just in the mutual fund realm, RBC Direct Investing clients have access to more than 2,000 mutual funds from over 100 different fund families, along with RBC Series D funds, RBC mutual funds with deeply discounted fees, available only to RBC's direct investors.
"It's all open architecture," says Mr. Storsley. "It's not just RBC funds, which were rated Best in Canada by Lipper two years in a row, but funds from pretty much any mutual fund distributor in Canada."
Direct investing firms have also introduced tools to help investors identify the right products for their own unique needs. "We've tried to do a fair bit of homework (for our clients). For example, in partnership with the experts at RBC Asset Management and RBC Dominion Securities, we've put together model portfolios of mutual funds and exchange-traded funds, customized for every investor profile."
Tools such as model portfolios serve a vital function for self-directed investors. "All of the principles that apply in portfolio management apply (to direct investing)," says Eric Kirzner, professor of Finance at the Rotman School of Business. "The first thing the investor has to do is determine what the appropriate asset mix is for them. You have to go through the whole know-your-client process that a good advisor would."
Not only do you need to determine an appropriate broad asset allocation, he says, but you also need to be able to define your diversification principles. "What percentage will you hold in U.S. equities? World equities? High-yield fixed income? If you can't do that, you're not ready."
Model portfolios can help make these important decisions. "If you're a very conservative investor, you can select a mutual fund model portfolio that is strongly tilted toward fixed income as opposed to stocks; if you're a very aggressive investor, you would choose a model portfolio more tiled toward equity mutual funds as opposed to fixed income," says Mr. Storsley. "There's an appropriate asset mix available for all investors, whatever their risk tolerance; we also have a very easy-to-use fixed income screener to help select the right fixed income instrument, such as a bond or GIC, appropriate for you."
An appropriate asset allocation is key to investment success.
In the latest market declines, a portfolio with 60 per cent in stocks and 40 per cent in bonds would likely have been down 20 to 30 per cent, says Prof. Kirzner. "A portfolio with 50 per cent in bonds and 50 per cent in stocks was down between 18 per cent and 24 per cent. That is extreme, but it does point to the fact that high-equity portfolios are much riskier than some people realize. Based on historic asset classes, equities outperform bonds by about 3.5 per cent per year - but that ignores psychology. People panic when they start losing money and start making decisions out of fear."
It's very difficult to go through periods such as 2008 and 2009, he says. "Many people didn't do that - unless they had an asset mix that allowed them to sleep at night."
Improve your online investing skill
Online tools can help you make the important decisions required to invest successfully. Eric Kirzner, a professor of Finance at Rotman School of Business, provides a checklist.
- Just as advisors complete a know-your-client process, a direct investor must 'know thyself': what is your time horizon and risk tolerance? Do you have sufficient understanding of the investment products you're buying?
- Determine an appropriate asset mix, including percentages of fixed income, equities and cash equivalents (money market funds and/or GICs).
- Define a return target and a risk (volatility) margin. (e.g., My average return objective is six per cent per year and I can tolerate volatility of negative 20 per cent per year.) Test against historical data for reasonableness.
- Define your diversification principles: within your asset categories, will you invest in passive (index fund) investments, managed (mutual fund) investments or directly in stocks and bonds? Within your fixed income portfolio, will you invest in government or corporate bonds or both?