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investor clinic

Managing a stock portfolio requires a fair bit of knowledge and emotional discipline and many beginners can get overwhelmed, leading to costly mistakes.Getty Images/iStockphoto

Last week's column, which showed how high fees can harm investing returns over the long run, elicited a lot of feedback from readers.

I heard from advisers who said the column depicted the investment industry in an unfairly harsh light. I heard from people who took up do-it-yourself investing and have never looked back. And I heard from folks who want to learn how to invest on their own but don't know where to start.

Today's column is for the last group.

First, here's what newbies should not do: Open a discount-brokerage account and start picking individual stocks. Managing a stock portfolio requires a fair bit of knowledge and emotional discipline, and while I think most people can do it if they put in some modest time and effort, it would probably overwhelm most beginners and could lead to costly mistakes.

That's why I've deliberately chosen what I consider to be the easiest, lowest-stress DIY investing methods. All of these options will give you a nice combination of diversification and low costs – two of the most important ingredients in a successful investing plan.

Buy a balanced mutual fund

All of your investments in just one fund? Hey, I said I wanted to keep it simple. A balanced mutual fund will give you exposure to stocks and bonds in one convenient package, and – when you have some extra cash to invest – you can make additional contributions with no brokerage fees. One of the most user-friendly fund providers is Tangerine, which offers three balanced index funds with various stocks-bond mixes depending on your risk tolerance. The middle-of-the-road option is the Tangerine Balanced Portfolio, with 40 per cent of its assets in Canadian bonds and 20 per cent each in Canadian, U.S. and international stocks. All of Tangerine's funds (it also offers two all-stock index funds) must be purchased directly from the company and have the same management expense ratio (MER) of 1.07 per cent, which is reasonable considering there are no additional account fees. Another plus: You can start with as little as $100 and make additional contributions of $25 or more.

Want more choice? If you open an account with a discount broker, you'll have access to a much broader menu of balanced funds. MERs will be lower in many cases, but you might run into brokerage-account fees or higher investment minimums. The Mawer Balanced Fund, for instance, invests about one-third of its assets in bonds (primarily Canadian), with the rest spread across Canadian, U.S. and international stocks. The MER is 0.94 per cent, but the fund has a $5,000 minimum initial investment. Another balanced fund worth considering is the TD Balanced Index Fund, with an MER of 0.89 per cent and minimum initial and subsequent investments of $100 (some discount brokers will have higher minimums). There are many other worthy balanced funds out there that you can find by googling "best Canadian balanced funds."

Buy a balanced ETF

Exchange-traded funds typically have lower MERs than mutual funds. The downside is that – in most cases – you'll pay a trading commission whenever you buy or sell an ETF. Many DIY investors prefer to build a portfolio of several ETFs, but you can accomplish the same thing by purchasing a single product such as the iShares Balanced Income CorePortfolio Index ETF (ticker: CBD). With an MER of just 0.73 per cent, CBD holds a basket of 17 other ETFs that invest in Canadian, U.S. and international dividend stocks, preferred shares, bonds and real estate. For more aggressive investors, the iShares Balanced Growth CorePortfolio Index ETF (CBN) is tilted more heavily toward equities and has a slightly higher MER of 0.83 per cent.

Buy a dividend mutual fund or ETF

If you can handle some additional risk – and if you already have "safe" money parked in guaranteed investment certificates or a high-interest savings account – a low-cost dividend fund can be a great way to build your wealth. I covered Canadian dividend ETFs in two of my recent Yield Hog columns here and here. Dividend mutual funds have higher costs than dividend ETFs, but thanks to the advent of D series funds targeting DIY investors, MERs have come down substantially. The RBC Canadian Dividend Fund series D, for instance, has an MER of 1.21 per cent and boasts a five-year annualized total return (including dividends) of 9.8 per cent, compared with about 7 per cent for the S&P/TSX composite index. Other companies with D series dividend funds include Bank of Montreal, Beutel Goodman and Toronto-Dominion Bank. Tangerine's recently launched dividend fund, which provides Canadian, U.S. and international exposure, is also worth a look.

Use a robo-adviser

Automated investing services such as WealthSimple, WealthBar, Nest Wealth and ModernAdvisor will set you up with a portfolio of ETFs to match your risk tolerance and goals. You fund your account and they look after the rest, including any rebalancing of assets that may be required. Costs are low – WealthSimple, for instance, charges 0.5 per cent annually on top of the ETFs' MERs of about 0.2 per cent – and basic financial planning advice may also be available. It's an intriguing business model, but robo-advisors are relatively new so be sure to read online reviews and ask lots of questions before you take the plunge. Also, check out my colleague Rob Carrick's robo-adviser survey.

Closing thoughts

Selecting an investing vehicle is just the beginning of your DIY investing journey. The next step is to focus on saving and making regular contributions, while reinvesting your dividends to take advantage of compounding. Finally, to achieve long-term investing success, you must stay committed to your plan through good markets and bad – even when there is no adviser there to hold your hand.

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