Getting Started with Self-Directed Investing
27 February 2023 1
27 February 2023 1

Matt Dewey 
(Enriched Academy Financial Coach / AFCC)

Investing is something most of us should be a lot more focused on to ensure our money outbattles inflation, grows over time, and provides us plenty of options on how we spend our retirement years. Compound interest and investment returns work wonders — but only if you invest the funds in your Tax-Free Savings Account (TFSA) or your Registered Retirement Savings Plan (RRSP). However, there are many options and considerations when it comes to deciding how to invest your money. Even if you have done your homework and decided to make the switch and graduate from a financial advisor to a self-directed account, the process can still be intimidating.

Considerations for self-managed investments
The first thing that you need to establish before setting up a self-directed investment account are your parameters for risk tolerance, then you can move on to determining your asset allocation. Risk tolerance varies widely from person to person and also depends on your current financial position, your time horizon for needing the money, and how comfortable you are with market volatility.

RRSP and TFSA eligible investments include equities (individual stocks, mutual funds, ETFs) and fixed income assets such as bonds, GICs, cash — even gold and silver. For the purpose of this article, we will focus on equities and fixed-income assets for your asset allocation.

Let’s pretend you have 20 years until retirement, and you are comfortable with market volatility, so you decide on 80% equities and 20% fixed income for your asset allocation.  Great, first big step completed!

Where to invest your money?
You’ve decided on DIY investing and determined your asset allocation, so now it’s time to move on to deciding what you want to invest in. If we stick with the example allocation above — the 80% portion for equities could be split among individual stocks, broad-based exchange-traded funds (ETFs) which tracking a particular country or even the whole world, or focused ETFs which may track a particular aspect of the economy like technology, energy or infrastructure. The 20% portion dedicated to fixed income could be in GICs, cash, corporate bonds, short-term bonds, long-term bonds, or even a blended bond fund.

Before you decide to invest by yourself and make all the decisions, you must be comfortable doing so. If you want to be in control of how your money gets divided up that’s great, but you are likely in the minority of the population. The majority of us do not feel confident in knowing which country, region or industry to invest, or the optimum ratio of short-term bonds to long-term bonds. If you fall into this camp, there are a few simpler alternatives to consider.

All-in-One ETFs
The pressure to decide on which investments will meet your asset allocation may be too much for some and can cause analysis paralysis and a lot of stress. It may even force them to stick with their high-fee mutual funds out of comfort and ease.

Fund providers have noted that this is a very common problem and have started offering all-in-one ETFs that as the name implies, are designed to offer one-stop shopping for maintaining a given asset allocation and risk profile. Percentages differ, but most providers offer five choices ranging from 100% equity on the high end of risk – down to 20% equity and 80% fixed income at the low end of the risk scale.

All you need to do as an investor is decide on the all-in-one ETF that matches your asset allocation and risk tolerance!

How an all-in-one ETF works
The ETF provider’s investment management team monitors the economy and many other factors and makes all the investment decisions to rebalance your portfolio, so you don’t need to! For example, if you decided to invest 80% in equities and 20% fixed income and bought an all-in-one ETF, that 80% would likely be split between the US, Canada and international markets. The 20% fixed income would also be split between corporate bonds, government bonds, treasury bonds — all with varying maturity dates.

The beauty of this is that you are making the decision to buy a product that rebalances to your risk tolerance, but also has the benefit of relying on the ETF provider to move your money to different countries and/or sectors to adapt to changing risks. This is an excellent option for those looking to take control over their investing, but do not have strong enough skills/interest to reallocate their portfolio between regions or industries or adjust the type of bonds you are holding as interest rates change.

For example, an all-in-one ETF could have the equity portion allocated 35% US, 25% Canada, and 20% international one month, but after analyzing the latest data could flip to 25% US, 40% Canada, and 15% international the following month. This doesn’t affect your asset allocation in terms of equity versus fixed income, but you can take comfort knowing that actions are being taken on your behalf to keep everything aligned to your asset allocation and risk profile.

Invest with a Robo-Advisor
Similar to all-in-one ETFs, robo-advisors manage your portfolio based on the risk tolerance you set when you open an account. They adjust the actual investments you hold, but robo investing will always automatically rebalance to your equity versus fixed income percentage.

The main difference here is that you don’t need to make any decisions on an ETF investment strategy – that is done 100% for you by the robo-advisor account. The robo-advisor will also immediately reinvest any new funds you add, so you do not need to devote any ongoing maintenance to this plan — aside from adding more money on a regular basis!

Self-directed vs all-in-on vs robo advisor fees
We’ve outlined 3 investing options:  1) A 100% DIY approach where you pick all your own stocks and ETFs. 2) An all-in-one ETF where you choose one ETF based on your asset allocation. 3) A robo-advisor that manages a portfolio of ETFs continually rebalanced to match your asset allocation.

The DIY option should come with the lowest fees (MER or management expense ratio) as you can buy a balanced portfolio of ETFs for under 0.2% annually. Please note that every online brokerage platform has different fees for buying and selling ETFs and stocks.

The all-in-one option should come with slightly higher fees than 100% DIY since there is a slightly higher charge to rebalance your portfolio – but most seem to fall between 0.2% to 0.3%.

The robo advisor option would be the most expensive as most of their MERs are around 0.15% to 0.25% and they charge an additional management fee of 0.2% to 0.75% to automate the process for you.

Basically, the more you do yourself, the more money you can save. However, it is important that you take an honest assessment of yourself and whether saving a small percentage is worth it for you.

Other Considerations
Time – how many hours per week, day, month are you realistically able to devote to your investing plan? If you are going to go with 100% DIY, this should be established before you begin.

Knowledge and confidence – if you are leaning towards a 100% DIY approach, what factors would you be monitoring for changes to your asset allocation or where your money is invested.

Have a plan – if you are going DIY, come up with an investment plan and write it down before you begin. Set rules for yourself to follow, so you don’t start buying stocks based simply on emotion or other factors. For example “Invest in no more than five individual stocks at any one time totalling less than 15% of my portfolio. There has to be at least 75% in broad-based ETFs and I can only  hold up to 10% in focused ETFs that target particular industries. I will review my plan once a year and adjust as my circumstances change.”

Self-directed investing is great to help you save money on mutual funds MER fees and keep more of your money in your investments, but you need to make sure you set yourself up for success before you begin. Be honest with yourself about your ability and discipline to set and follow your rules because there will be no one holding your hand. A financial coach can discuss your goals, but your asset allocation will come down to you and your comfort level with the ups and downs of the financial markets.

Leave a reply
Anbali Bakare
Jul 21, 2023 11:47:28

Am ready