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Portfolio Strategy

Getting started as a do-it-yourself investor Add to ...

An often overlooked drawback to do-it-yourself investing is the burden of having to choose from an overwhelming selection of Canadian stocks, U.S. stocks, American depositary receipts, preferred shares, mutual funds, exchange-traded funds, closed-end funds, government bonds, corporate bonds, GICs and more.

Finding the right investments to build a portfolio is certainly a lot tougher than finding a good broker. You’ll find lots of guidance in The Globe and Mail’s 14th annual ranking of online brokers, which was published this week. For more help, check out another Portfolio Strategy column about online resources for finding a broker.

Once you’ve chosen a broker, you’re on the spot. Leaving money to sit in your account is negligence because returns range from laughable to non-existent. Here are four ideas to help you get started as a do-it-yourself investor. All were chosen on the understanding that access to low-fee investments is one of the main attractions of investing yourself.

Create ultra-cheap ETF portfolio

ETFs are a low-fee option for building a diversified portfolio, but you do have to pay commissions to buy and sell them. A few brokers have done away with these fees to varying extents, and that creates an opportunity for cost-conscious investors.

The idea here is to pair up low-cost ETFs with brokers like Scotia iTrade and Qtrade Investor, which offer a limited selection of ETFs with no commissions, or Virtual Brokers, which allows investors to buy any Canadian or U.S.-listed ETF with no commission. Sell trades cost the usual amount, although Virtual’s commissions are as low as 99 cents a trade.

Among the low-fee ETFs offered by Scotia iTrade are the Horizons S&P/TSX 60 Index ETF (HXT), with a management fee of 0.08 per cent, the iShares 1-5 Year Laddered Government Bond Index Fund (CLF), with an MER of 0.17 per cent, the iShares 1-5 Year Laddered Corporate Bond Index Fund (CBO), with an MER of 0.28 per cent; and, the Vanguard MSCI EAFE Index ETF (VEF), with an MER of 0.48 per cent. Qtrade’s low-fee ETF offerings include all of the above, except for VEF.

At Virtual Brokers, you could set up a no-cost monthly or quarterly investment purchase plan for any ETFs. To put a lid on costs, consider the bargain-priced offerings from Vanguard, a U.S. player that now lists ETFs on the TSX. The Vanguard MSCI Canada Index ETF (VCE) has an MER of 0.13 per cent, which admittedly is a little pricier than HXT. However, VCE is a conventional ETF that holds the actual stocks in its target index, while HXT is a more complex product that uses derivatives to track its index.

Accompany VCE with Vanguard’s bond, U.S. and international holdings and you end up with one of the lowest cost portfolios possible outside of simply buying and holding stocks.

Use mutual funds and get professional help

DIY investors don’t tend to think much about mutual funds because the cost of owning them is high, for the most part. But there are a few fund companies that are ideal because they keep their fees low by paying little or nothing to brokers who sell their products. Some fund companies to investigate are Beutel Goodman; Mawer; Phillips, Hager & North; and Steadyhand. All offer exactly the sort of stable, well-run, no-nonsense products that are ideal for long-term investing. Consider Mawer Canadian Equity, with a 20-year average annual return of 9.7 per cent, better than two percentage points higher than the average Canadian equity fund, and a bit more than the S&P/TSX composite index as well. Like all the funds in this low-cost group, Mawer Canadian Equity is team-run and not hostage to a star manager who many leave at any time.

Other funds to investigate: Steadyhand Income and Steadyhand Equity; Beutel Goodman’s D-series Canadian equity, income and balanced funds; and PH&N’s D-series bond funds and its dividend income fund.

Note: RBC Direct Investing has stopped selling funds from Mawer and Steadyhand, as well as Leith Wheeler, which is another low-fee company of note. Most other firms still offer these funds, many with zero costs to buy or sell.

GICs for fixed-income holdings

Stop beating your head against the wall trying to find government and investment grade corporate bonds with a decent yield. Guaranteed investment certificates from small banks, trust companies and credit unions are a better choice if you put a premium on a reasonable yield and safety and don’t plan to sell before maturity.

A five-year provincial government bond might get you a yield of 1.7 to 1.9 per cent these days. Five-year GIC yields run as high as 2.5 per cent.

GIC rates are higher than bond yields because of the competition among issuers to raise money they can lend out. Another mark against bonds is the hefty markup brokers apply to the prices charged to their customers. The more you pay to buy a bond, the lower your yield.

Don’t sweat the unfamiliarity of the smaller GIC issuers, such as trust companies and credit unions. They’re either members of Canada Deposit Insurance Corp., or a provincial credit union deposit insurance plan. Anyway, big financial firms sometimes offer top rates as well. That 2.5-per-cent five-year GIC was offered by Manulife Bank.

Use dividend reinvestment plans

Pick some solid blue-chip stocks and have your broker collect your dividends and use them to buy more shares of the company at no cost to you. Broker DRIPs aren’t as versatile as the plans you set up directly with a company through its transfer agent. Most important, you can’t buy fractional shares with a broker DRIP. Still, these DRIPs are a great way to effortlessly build wealth over the long term at no cost.

Before getting started as a DRIP investor, take note of the fact that brokers vary quite a lot in how many DRIP stocks they offer. Some firms offer only a modest selection of Canadian stocks, while others offer more than 1,000 Canadian and U.S. companies.

DRIP stocks can be held in either registered or non-registered accounts along with all your other investments. Exchange-traded funds are often eligible for DRIPs as well.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

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