I’ve been a Do-It-Yourself investor for about 5 years now. At first it was a little bit intimidating with all the options and investment products out there, but once I determined a simplified strategy it became a whole lot less scary. This type of approach may not be suitable for everyone. If finances and investing doesn’t get you all hot’n’bothered and you’re genuinely uninterested it may be best to consult a financial advisor to help out.
Emotions are your Worst Enemy
When I first started investing I continuously monitored the balance of my account as if at any moment the value might plunge or skyrocket. I screamed at the TV if the TSX (Toronto Stock Exchange) went down a few points in a day and gave a hard first pump when it gained. Aside from looking like an idiot it also was emotionally tiring second guessing my every move.
This type of mentality can be damaging to your portfolio as a sudden drop in the markets may incite you to sell, when it may be a better time to be buying investments on the cheap (not to mention the transaction fees you get hit up for). I spoke earlier about timing the markets and how for the typically small investor it’s a big no-no. Instead I invest for the long run and don’t sweat the ups and downs of the markets. Historically speaking, over the long run I have a much better chance of increasing the value of my portfolio using this approach. After reading up on a few investment books and tapping into the DIY investing community I learned a lot of people have taken this long-term approach in their investment strategy known as the couch potato strategy.
Set-It and Forget-It
Setting up a systematic style to investing is a sure way to eliminate emotions. For example, create an automatic monthly transfer from your bank account to your investment portfolio. Doing so ensures you are consistently adding to your portfolio and also minimizes overall investment risk via dollar cost averaging (see my post below on A Simple Way to Minimize Your Investment Risk).
Introducing the Inter-Web
The internet has made it unbelievably cheap and easy to be a DIY investor today. There are tons of online investment brokerages that allow you to buy and sell investments in real time. So how do you decide where to invest your money? This is obviously a personal question and depends on your attitude towards risk and reward. Personally speaking my investment portfolio mix is 80% equities (shares of publically listed companies) and 20% bonds/fixed income (debts of government and large corporations with lower risk and typically lower reward). Many advisors will say 80% is the absolute most you should invest in equities, but to each his own. Because I am younger and at the start of my investing career I can handle the down swings in the markets, knowing eventually I’ll end up in the black. If you don’t like swings in the market or if you’re older you may want to consider a heavier allocation in bonds and fixed assets.
Mutual funds have been the choice of many investors because they offer a low maintenance way of diversifying your investments. Diversifying is just a fancy-schmancy way of saying “don’t put your eggs all in one basket”. For example, having only one type of investment in your portfolio is very risky because if that investment tanks so too does your entire portfolio. A mutual fund is a pie made up of multiple individual investments, so instead of going out and having to buy tons of investments to diversify you can purchase one type of mutual fund. Mutual funds are managed by various investment companies often have embedded fees in them that will reduce your overall gain.
I’m exclusively invested in a similar product called exchange-traded funds (ETFs) that typically track indexes (eg. The TSX) that have much lower fees on average. Doing this gives me the advantage of easily diversifying my portfolio at a low management fee.
Overall my investment strategy is consistently boring and filled with very few surprises, which I love. I’m not looking to become the next Warren Buffet by researching businesses and markets for hours every day. I’m out to get a decent return on my money without being kept up at night with worry. There are lots of tools and advice out there, but like most things in life, keeping it simple is often the best way to go.by