Thinking of managing your own investment portfolio?
Self-directed investing is one of several money management strategies, but to do it successfully you often need to have deeper investment knowledge.
This article explores self-directed investing, and key points to consider if you’re thinking about becoming a self-directed investor.
Self-directed Investing Explained
Self-directed investing, also known as do-it-yourself (DIY) investing, is where individual investors build and manage their own investment portfolios.
As a self-directed investor, you are in charge of your own investment strategy. You decide which investments you want to buy and sell, and when to trade. Generally, you use discount brokers and online trading platforms to make trades.
Being in charge of your own investments means you do your own research on the investments you’re considering, and that can involve analyzing financial statements.
Why Self-directed Investing May be Appealing
According to BCSC research, self-directed investors are diverse in their motivations for investing, and how engaged they are in managing their portfolios.
- While 77% of all investors say their main investment goals are long-term savings or retirement, DIY investors are more likely to say they also invest for other reasons – like generating additional income, the chance of receiving a very large return, or just to have fun.
- Thirty-three percent of DIY investors said having more control over their investments is the most important reason for managing their investments themselves.
- Other key reasons for managing their own investments include convenience and gaining more financial literacy.
DIY investing may also feel like the right fit for some investors because:
- It may be a cheaper way to invest. In some cases, you may end up paying lower fees when you buy and sell your own investments. You’ll likely pay general trading fees and charges, but not fees and charges related to working with an investment advisor.
- You may have a greater feeling of control over your investments. Generally, taking control of your portfolio as a DIY investor means you’re more actively involved in your investments and your financial future.
- You may want to learn more about how trading and the markets work. Self-directed investing involves doing your own research and being in charge of your own investment decisions, which can build your investment and market knowledge.
Potential Pitfalls of Self-directed Investing
While DIY investing can seem appealing, there are some possible disadvantages to managing your own investments.
- Financial markets can be volatile and unpredictable, and you may not know how to act. If you’re a beginner investor, it’s likely that you don’t fully understand how to analyze the companies, markets, or products you’re considering investing in, which could lead to costly mistakes.
- You’re required to do your own research and portfolio management. This could be a disadvantage if you don’t have time, or you don’t have a good understanding of investment strategies and portfolio structure.
- The convenience of online trading could lead to emotional decisions. You may make rash decisions, such as panic-selling during periods of market volatility or holding on to a stock for too long. This may cause you to lose sight of your long-term financial goals or overall investment plan.
Questions to Ask Yourself Before Becoming a Self-directed Investor
Before going at investing alone, consider asking yourself the following four questions.
1. Do I Understand the Relationship Between Investment Risk and Return?
When you consistently seek higher returns, there is usually a greater risk of losing your investment. Understanding your risk tolerance and the different types of investment risk is an essential part of your investor journey.
2. Do I Understand Investment Products and How to Trade Them?
There are many different investment products out there, and it’s good to have a solid understanding of how they work. This video gives you a quick look at five common types of investments.
It’s also important you understand how different types of trades work before you start trading. There are different types of accounts and positions you can take when you trade, and different kinds of trades may track different risks.
3. Am I an Emotional Investor?
If seeing your portfolio taking a dive drives you to want sell all or some of your holdings, or you constantly worry about losing money, consider whether you are ready for the stress of managing your own investments. Investment markets move up or down daily. Emotional decisions made purely on market movements can have detrimental effects on your portfolio’s performance. Furthermore, trading fees from moving back and forth between investment products can eat into your returns.
4. Do I Like to Research Investments?
Reading about the investment products you purchase and monitoring your portfolio is key to ensuring you are on the right track with your goals. You should do this even if you have an investment advisor, and should do this on a regular basis to make sure you have the right mix of investments in your portfolio.
More Canadians are Choosing Self-directed Investing Over Financial Advisors
The 2024 BCSC research showed convenience, control, and lower costs are motivating some investors to manage their own portfolios, instead of working with an investment advisor.
The research also showed self-directed investors tend to have less trust in media, government, and financial institutions. Those who choose not to work with advisors cite concerns about the value of professional advice, cost, and a desire to bear personal responsibility for losses.
Read the full research here.
Be Wary of Social Media Investing Trends
Many people use social media as a source of news and information, including financial information. These social platforms are full of financial advice and so-called money experts. It’s true you may find information to help you plan your financial future, but there are problems and red flags that come with relying on social media for investing advice.
Fraudsters Use Social Media to Present Fraudulent Opportunities
Fraudsters will use social media to trap investors in scams. They use various online tactics, including creating fake websites which can look sophisticated. They may also share false success stories or hop on the latest investing trend to try and gain your trust or appeal to the emotional tug of FOMO (“Fear of Missing Out”) to pressure you into a scheme.
Protect Yourself
Don’t just take someone else’s word for it – do your own research before committing to an investment, and always make decisions according to your risk tolerance, time horizon, and financial goals. Learn how to conduct your own research.
If an investment opportunity seems too good to be true, it probably is. Learn more about the warning signs of fraud by watching these videos.
Alternatives to DIY Investing
As mentioned before, self-directed investing is just one option you have to manage your investments. A registered investment advisor or a robo-advisor can help.
Working with a Registered Investment Advisor
A registered investment advisor is someone who works with you to manage your investments. They can provide investment advice on a range of securities, and provide guidance according to your risk tolerance. Some are qualified to fully manage your portfolio. Investment advisors work for firms that are independent or owned by full-service organizations like banks.
You may want to work with an investment advisor to benefit from more personalized support and information. Choosing someone who feels like a right fit for you and your financial goals is important, so make sure to ask questions, run a background check, and understand the advisor’s fee structure before you commit. Go to our Titles and Designations page to find out about the different types of investment advisors available to you.
You Can Still Be an Active Investor While Working with an Advisor
Working with an investment advisor does not mean you have to take a back seat when it comes to your investments – you can still play an active role in managing them. That includes monitoring your portfolio and asking questions when you buy or sell investments. These are just some ways to build good money habits over time!
Using a Robo-advisor
Robo-advisors are online investment advisors that often offer a mix of personalized and DIY investing services. There is minimal human interaction, and you’ll likely be offered standardized portfolios containing lower-cost investments. Robo-advisors typically charge lower fees because the operating costs are lower. The process is usually automated, but some models involve human advisors operating alongside the technology.
Robo-advisors make money in various ways. Some platforms may charge management fees up front. Another way is through interest earned on cash balances, which gets credited to the robo-advisor instead of the investor.
Robo-advisory services might be a good choice for you if you’re digitally savvy and want to pay lower fees. Keep in mind that investment recommendations are usually made for you based on algorithms, and they may make decisions without your specific approval for each trade. It’s also a good idea to use the Canadian Securities Administrators national search tool to check registration of the platform you’re considering.
Want to learn more about what to think about working with an investment advisor, robo-advisors, or self-directed investing? Check out our page on managing your money.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact the BCSC Contact Centre at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip using the BCSC’s online complaint form.
InvestRight.org is the BC Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.
