If you want to be a do-it-yourself investor, Shannon Dalziel says you need to know your client – you.
It's not as easy as you might think, says Ms. Dalziel, an investment adviser at PWL Capital Ltd. in Toronto. You need to understand your own "behavioural bias" – your outlook, your philosophy and how you will likely act when things don't go as well as you expected with your investments.
"Behavioural bias gets in the way for investors. Sometimes markets might go down, and you'll want to abandon your investment philosophy. You need to remember that this is your long-term plan."
Becoming a do-it-yourself investor isn't for everyone. You probably don't cut your own hair, you certainly don't do your own dentistry and as the saying goes, the lawyer who self-represents has a fool for a client.
On the other hand, do-it-yourself investing becomes easier all the time, with courses, online tools and even advisers who make themselves available on a pay-as-you-go basis. The advantages to self-investing are no management fees, low transaction fees (usually through online brokerage services) and the satisfaction that comes from making your own decisions.
Ms. Dalziel's firm offers investors lessons in how to set up their own investment programs. Participants pay a fee and can purchase additional advice by the hour; this differs from the standard advisers' charges, which are usually based on each transaction or percentages of purchases and sales.
"We work with investors who fall below our minimum [for the firm to manage an account], who in many cases have had high-fee mutual funds and are looking for a low-cost portfolio that they can manage on their own," Ms. Dalziel says.
Learning how to do this takes time and discipline. People are bombarded with news that may or may not affect markets and investments.
"Sometimes the best way is to tune that out. We're helping investors build something they can stick to over the long term," Ms. Dalziel says. She counsels self-investors to develop a buy-and-hold strategy.
The other pattern she and her colleagues see a lot is clients who have trouble "knowing when to pull the trigger" and either buy or sell a security.
"We see people who are sitting with a lot of cash and they don't know what to do," she says. While buy-and-hold is a good strategy, an educated self-investor will learn that there are also times to sell.
Self-investors should make sure that the asset allocation they have selected for their portfolio continues to make sense as their financial circumstances evolve and the markets change. "You should revisit this at least once a year," Ms. Dalziel says.
The fundamentals of investing are always the same. Start with planning: look at your current financial situation and where you want to be when you get older, particularly when it's time to retire, she says.
The portfolio you develop for yourself should be consistent with your goals and your risk tolerance. For self-investors the added wrinkle is that it should be something that you're capable of managing on your own.
Ms. Dalziel and PWL promote their advisory service on the Canadian Couch Potato investment website, which features a blog authored by her colleague Dan Bortolotti. The Couch Potato approach, developed by U.S. financial writer Scott Burns, relies heavily on passive investing, largely through index mutual funds or exchange-traded funds (ETFs).
An index fund is one that holds most or all of the stocks or bonds in a particular market – it rises or falls with the entire index exchange. An ETF is similar in that it holds a portfolio and tracks a particular index – the difference is that unlike a fund, an ETF is itself bought and sold like a stock.
Mr. Burns wrote in 1991 that a passive investor – a couch potato if you will – can usually beat the experts by putting 50 per cent of his or her holdings into an index fund that tracks the S&P 500 and the other half into a fund tracking the U.S. bond market.
As the two funds rise and fall with the markets, every year you should rebalance. Today's do-it-yourself couch potato investors might buy and sell different funds and ETFs than the two U.S. ones.
"If you're still in the accumulation stage where you have tax-deferred accounts such as an RRSP (Registered Retirement Savings Plan) or a tax-free savings account, it's a little easier to manage your own portfolio. Once you get into the taxable accounts, where you have corporate accounts and a taxable situation, then we suggest working with an adviser," Ms. Dalziel says.
Keep up with your studies too. The Canadian Securities Commission, which licenses brokers, offers a course tailored specifically for investors who want – and will likely need – to learn more.