Before you dive into DIY investing

As Canadian investors begin to receive the enhanced annual reports mandated by Canadian regulators, some may consider the do-it-yourself investment approach as a way of avoiding professional investment management fees. T.E. Wealth has always provided clients with this information. For investors who are thinking about managing their portfolios themselves, here are some things to consider.

Know your investment options

In today’s era of 24/7 news coverage and omnipresent technology, anyone can conduct investment research with a click of a button and access the unprecedented database of equity research that is freely available on the internet. But the vast amount of data and information available makes it equally likely that small – but crucial – details could be overlooked.

Consider the case of Deutsche Bank last fall. It is possible that a DIY investor in this security might have missed certain crucial details, such as the U.S. Department of Justice investigation into how mortgage-backed securities were sold during the 2008-2009 financial crisis, the subsequent $14-billion-dollar litigation made public in September 2016, and the intricacies of the settlement process resulting from this action.

Investors who sold Deutsche Bank around September 2016 likely experienced a variety of emotions ranging from confusion to frustration when that same stock promptly rebounded and— by February 2017— was up by as much as 72%.

Investing on paper is different from real-life risk taking

Indeed, the investment process can be an emotional exercise. When investors rely on emotions rather than analysis to make decisions, they are more prone to abandoning disciplined investment models, no matter how sophisticated and well-thought-out. Emotional decision-making can be costly.

However promising it is, an investment strategy can only be effective if it is consistently implemented. An investment professional can help an investor stay the course during times of uncertainty, when the investor might otherwise be tempted to make drastic changes to their portfolio.

Be skeptical of what you see on TV

Media pundits often suggest stock picks to their viewers, and while this might be entertaining to watch, investment advice obtained in this way may not be effective. Rather than offer unique investment insight, these shows tend to merely reflect general market sentiment and might well encourage investors to buy or sell without a firm grasp of the underlying fundamentals driving the stock price.

Investment news obtained in this way might encourage investors to trade around earnings announcements, buy and sell on hype, and attempt to capitalize on claims of opportunity without fully questioning the underlying assumptions.

The cost of managing a portfolio

Due in part to increased competition as well as advances in technology, trading commissions have declined significantly over the past decade. Notwithstanding, transactions do incur costs, and costs accruing from an investor’s trading frequency can influence returns over time.

Investors considering self-directed investing will do well to weigh the benefits of using a professional investment manager against the cost of not using one.

Closing thoughts

Self-directed investing puts knowledge and emotions to the test. As the example above illustrates, security selection requires time, discipline, and skill. Professional investment advice can provide the expertise and reassurance needed to help investors adhere to a predetermined strategy— even when emotions run high.

At T.E. Wealth, our priority is to develop investment policy statements that make sense for our clients and allow them to benefit from the expertise of carefully selected investment managers and a continually refined, disciplined approach.

Vadim Lidich, T.E. Wealth, Toronto

This article was published in T.E. Wealth’s Strategies newsletter, February 2017 edition. Read the full edition here.

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