Should You Manage Your Own Portfolio

Every Canadian with basic computer skills and moderate financial literacy should theoretically be able to manage their own investments. The key to designing an effective investment portfolio relies on proper identification of your risk profile and personal situation.

But should you take this on this huge responsibility yourself?

Self-directed investing as never been easier. Online accounts, cheap portfolio ETFs, automated contributions, and plenty of free tools make investing very accessible. It also makes self-directed investing dangerous! With instant access and total control, it can be very tempting to let your emotions get in the way. A string of bad investment decisions, or even one large-impact decision, could derail your investment portfolio and set it back by years.

Understanding investment process, management, and risk while controlling emotions is crucial for self-directed investing success. Often times, a good financial adviser can benefit you simply by protecting you from your own dumb decisions.

Self-directed Investing Questionnaire

I often get questions from people asking whether or not they should invest without an adviser. I can never answer that question. All I can say is there are benefits to both. Self-directed is better for some because of cost savings. Adviser-led is better for others because they need that separation.

An honest evaluation of your risk and emotions is an important first step. It is pointless to build a portfolio and manage your own investments if you can't stick to your investment plan.

Here are some great questions to ask yourself before taking on self-directed investing:

  1. How long will it be before I plan to withdraw from my investments?
    1. Less than 5 years
    2. Between 5 and 15 years
    3. More than 15 years
  2. How long do I believe I should hold onto an investment after I make my purchase?
    1. Until it is clearly not doing as well as it should be
    2. Forever
    3. Every purchase has a pre-determined entry and exit price
  3. What is the appropriate action to take when the stock market drops more than 20%?
    1. Sell my stocks and move to cash/gold to avoid further losses in a bad market
    2. Don't make any trades at all and wait things out
    3. Sleep soundly, ignore the daily market action, and follow my strategy because it was all in the plan
  4. Is it reasonable to expect lower investment returns in exchange for more stability?
    1. I believe good investors can get great returns and stability by choosing the right investments
    2. I know less risky investments are not as lucrative over a long time period, but stability can be important
    3. My investment strategy has risks that are consistent with my risk tolerance
  5. Is it OK to change some of my investments based on a discussion with a knowledgeable friend?
    1. If my friend is successful I should seriously listen to what they say and make appropriate adjustments
    2. I believe I should stick to my investment plan and ignore "the noise"
    3. Every bit of knowledge should be thoroughly evaluated
  6. How often do I check my investment portfolio?
    1. I check my investments several times a week to make sure everything is on track
    2. I check my investments a few times a year
    3. I check my investments once or twice a month
  7. Do I get excited when I see my portfolio doing well?
    1. Yes, it's evidence my investment strategy is working
    2. Not really because I know market crashes come after stock market bubbles
    3. I focus on strategy and execution, not portfolio returns
  8. How long have I invested in stocks/bonds? Would I consider myself to be knowledgeable about investing?
    1. I'm just getting started and/or I don't know the difference between an ETF and an index
    2. I have been investing with an advisor for a while and/or I can explain the success rate of active managers compared to indexing
    3. I have long self-managed my investments with good returns and/or I understand the difference between a long put option and a naked short put

Scoring schedule: see bottom of article. Make sure you complete the questions honestly and mark down your answers before checking your score.

There are investors out there who simply should not manage their own investments. Don't be personally offended if you don't manage your own portfolio. Many Canadians are almost guaranteed to be better off using a good adviser than attempting investing on their own.

There are great financial advisers out there who charge a maximum 1% fee, invest their clients in low-cost portfolios, and provide very valuable service beyond just investing. An adviser can keep you on track with your saving, provide valuable tax and other financial advice, and make sure you are properly insured.

Investor behaviour is a huge influence on performance. Several comprehensive studies have found the average American investor in the last few decades would have achieved better results simply buying intermediate-term government bonds than managing their own diversified portfolio. A bad adviser sometimes made things even worse.

For investors who really want to self-manage but score on the lower end of this questionnaire, they should strongly consider a more conservative investment strategy. Write down their investment plan, limit the number of investments held, and take great care to stick to their plan. A simple Portfolio ETF is probably the best choice!

Investors who score high on this questionnaire should develop an investment strategy and write it down. They can move to more aggressive allocations and, if their assets are greater than $500,000, diversify over a few more asset classes. They could also consider more aggressive strategies like Trend Investing if they are very aggressive savers, have a good understanding of rules-based investing, and have long-investment timelines.

It is important to point out not all aggressive, or complex, investment strategies are good and they don't necessarily provide better returns. This advantage might be more dependent on the character and knowledge of the investor than the plan itself.

Personal Situation

Personal circumstances are the first important factor in portfolio development. If you are retired, or close to retirement, you should have a very different looking portfolio compared to someone who is decades away from retirement.

Taxes play the second factor and this is related to province and income level. High income people, or moderately high income people in high tax provinces, should invest with a careful eye to tax efficiency. This means use of swap-based ETF products, minimal trading to avoid tax triggers, and maximum use of capital loss opportunities.

Lower income people, or those with comparatively low marginal tax rates, can invest in income generating products without big tax costs.

Other personal considerations are longevity, spending flexibility, and the required income as a percentage of your portfolio when retired. People with shorter lifespans, considerable spending flexibility, or low withdrawal requirements can afford to invest more aggressively as they are not as susceptible to sequence risk.

Questionnaire Scoring Schedule

Add up the points for each italicized answer. Answer 1 = 1 point, Answer 2 = 2 points, Answer 3 = 3 points.

If you scored between 8-12, you should strongly consider investing with a good financial adviser. Despite their cost, you will almost certainly be better off with an adviser.

If you scored over 13, you might consider self-directed investing. Be careful, invest conservatively, and continue learning as much as you can to build confidence and avoid big mistakes.

If you scored over 19, you might be more suited to aggressive or complex self-directed investing strategies. Develop a plan and use your knowledge and comfort with investing to your advantage. Be careful not to fool yourself because of your knowledge.

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