The good news is that this is avoidable and it doesn’t have to happen to you. Here are the common mistakes that DIY investors make and tips on how to stay on track so that you can reach your financial goals.

What mistakes do DIY investors make? 

Over the years, I’ve seen many DIY investors who wanted to take the shortcut to get rich. Perhaps they could get away with it a first, but over time it catches up with them. 

I always find it interesting when you see people brag online about their short-term “wins”, but they go radio-silent after a few months when they’ve lost money. If you’re truly a long-term passive investor, here are common mistakes to avoid as a self-directed investor. 

Not paying attention to your fees 

If you’ve chosen an online brokerage or robo-advisor, you’ve already done a great job at eliminating fees. However, depending on which type of product you buy, you could be paying unnecessary fees. The investors that build a large nest egg are able to keep their hard-earned money in their own pockets—not transferring it to portfolio managers. Before you buy any product (such as a mutual fund, index fund or exchange-traded fund), find out what the fees are and see if you can find a comparable product for less fees. 

Making too many trades 

Online brokerages may incentivize you to make a certain number of trades in a quarter and offer you a discounted price. Don’t be fooled by this! That’s not for your benefit. It’s actually in the brokerage’s best interest because they earn money every time you make a transaction. The more trades you make, the more fees you may incur which will eat away at your portfolio’s performance. 

Letting FOMO get the best of you 

Do you remember the days of cannabis stocks, NFTs, meme stocks and cryptocurrency were all the rage? I admit, it was challenging not to feel any FOMO when you see clickbaity headlines about everyday people making a ton of money in a short amount of time. Look, I totally get it. I even dabbled in a Bitcoin ETF myself with my “fun” money. But before you take on speculative and volatile investments, be sure to do your research and ensure that it’s a logical decision—not an emotional one. 

Focusing on the short-term

There’s no need to get caught up in the stock market news since it’s normal for the market to fluctuate. In fact, the stock market will go through a correction roughly every two years, lasting about four months on average. When you’re worried about a dip in the market, just picture yourself walking up a staircase, and when you reach the end, you’ll be at the top. 

What is a monthly contribution plan (MCP)?

Once you’ve created your investment portfolio, you’ll want to continue making regular contributions. The more money you add to your portfolio, compound interest can help grow your net worth. Plus, every year, Canadians have the opportunity to contribute to their investment accounts, such as their Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). 

Here’s an example of how you can carry out the monthly contribution plan in your TFSA:

In 2024, the TFSA annual contribution limit is $7,000. It may sound like a huge amount, but if you divide $7,000 by 12 months, it works out to be $583.33 per month, $134.62 per week or $19.23 per day. I’m pretty sure most of us can think of a few ideas to save up $20 a day. Even if you can’t, start small and work your way up. If you don’t max out your contribution room for the current year, you still can catch up in future years. 

By contributing $583.33 per month to your TFSA, say if you’re invested in an index fund, you can buy shares every month (since there are usually no commissions charged on buying or selling). 

However, if you have an ETF, you’ll incur trading fees (usually up to $10 per transaction). So, you may want to accumulate a larger amount so that you can buy more shares and save on trading fees. 

What is dollar cost averaging?

Dollar cost averaging is a strategy for investors to divide up a large sum of money to spread out their purchases over a period of time. The benefit of dollar cost averaging is that you’re able to buy at the highs and lows of a particular fund and over time, it will average itself out. This way you don’t have to worry about timing the market. 

If you’re following the MCP discussed above, then it may make a lot of sense to do dollar cost averaging since you’re already contributing money into your investment account on a monthly basis. 

What are dividends?

Whenever you buy shares of a company, they may distribute their earnings in the form of dividends to their shareholders. Most of the time they are paid out quarterly, but they could be monthly or special one-time payments. 

For example, when you buy a share of Toronto-Dominion Bank (TD), at the time of writing, their quarterly dividend amount is $0.96 per share. So, if you buy 10 shares of TD Bank, in one quarter, you’ll receive $9.60 in dividends. In a year, you’ll earn a total of $38.40 in dividends ($9.60 in dividends x 4 quarters). 

How does the dividend reinvestment plan (DRIP) work?

When you receive dividends from your investment holdings, you may be able to enroll in a dividend reinvestment plan (DRIP) which allows you to take the cash dividends and automatically purchase more shares. It’s a great way to do dollar-cost averaging without paying any fees or commissions.

Tracking your performance

As tempting as it may be to monitor your portfolio’s performance daily or weekly, there’s really no need to. Especially when you have years before you need to withdraw your investments, such as for retirement. For most DIY investors, checking quarterly, semi-annually or annually should be sufficient. 

How to rebalance your portfolio

So, when you do look at your portfolio, what exactly should you be looking for? Well, you’ll want to determine if your portfolio’s asset allocation needs rebalancing. 

For example, if you have a portfolio with 80% stocks and 20% bonds, but over time it’s changed to 85% stocks and 15% bonds (because your stocks went up in price, but the bonds went down), then you’ll want to rebalance it so that your risk tolerance and asset allocation is back to normal. 

The simple way to do this is by selling the funds that have gone up in price and buying the funds that have gone down in price. 

Personally, what I like to do is take the money I’ve been contributing to my RRSP and TFSA all year long (plus any dividends that don’t have a DRIP option) and buy the funds that have gone down in price so that I don’t need to sell any funds. 

Learning from your investing journey

As humans, it can be easy to let our emotions get the best of us. When it comes to investing, it’s vital to control them so that we don’t get sidetracked from reaching our financial goals. Even if you do get off track, you always have the opportunity to make adjustments. 

Even as an experienced investor, I’ve made plenty of investing mistakes myself. As long as you take them as learning lessons, you can become a better investor and achieve your dream lifestyle. 

What’s the best discount brokerage in Canada?

There are 13 discount brokerages you can choose from. There are some similarities and differences between them. However, the path of least resistance for most people is to choose the same financial institution that they already bank with. 

• BMO InvestorLine
• CIBC Investor’s Edge
• CI Direct Trading
• Desjardins Online Brokerage
• HSBC InvestDirect
• Interactive Brokers
• National Bank Direct Brokerage
• Qtrade Direct Investing
• Questrade
• RBC Direct Investing
• Scotia iTrade
• TD Direct Investing
• Wealthsimple Invest

Factors to consider when choosing a discount brokerage 

When you’re determining which discount brokerage is your best match, here are some factors to consider.

• Stock trading commission – This can range from zero to $9.99 every time you make a trade. 
• Commission-free ETFs available – Most brokers have stocks and/or ETFs where they waive the commission fee. This can save you money if you make frequent trades.
• Foreign exchange rate – If you plan to buy international funds, you’ll be charged a foreign exchange fee and the costs will vary. 
• Mobile app features – having the app makes it convenient to check quotes and make trades while on the go. Some apps have enhanced features.
• Average wait times – In most cases, you may only need to wait a few minutes to get someone on the phone to help you. However, there are a few that have longer wait times.

The Globe and Mail published an online comparison guide, which will make it easier for you to make a decision.

How to open an account with an online brokerage 

Now that you’ve done your research and have chosen an online brokerage, here are the next steps on how to open an account. 

Step 1: Choose the type of investment account 

Explain the different types of investment accounts available. Depending on which brokerage you choose, they may offer any of the following accounts: 

• Tax-Free Savings Account (TFSA)
• Registered Retirement Savings Plan (RRSP)
• Spousal Registered Retirement Savings Plan (Spousal RRSP)
• Margin Account
• Cash Account
• Non-Registered Account
• First Home Savings Account (FHSA)
• Registered Education Savings Plan (RESP)
• Registered Retirement Income Fund (RRIF)
• Locked-In Retirement Account (LIRA)
• Life Income Funds (LIF)
• Registered Disability Savings Plan (RDSP)

Step 2: Fill out the online paperwork 

You’ll be asked to create an account (if you don’t have one). You may be required to provide the following information:

• Personal (e.g. contact info, mailing address)
• Employment (e.g. where you work)
• Financial (e.g. income, assets and liabilities)
• Tax residency (e.g. SIN and tax reporting info)

Step 3: Move your accounts over 

Once you’ve created your accounts with the new financial institution, you can transfer accounts from another financial institution, if needed. You’ll need to provide the banking information from your existing accounts. Your new broker will contact your existing broker and facilitate this process. They may even waive the transfer fees for up to a certain amount. 

For more details, check out these helpful articles about transferring your TFSA and transferring your RRSP.

Step 4: Add money to your account

Now you can fund your account. You may have several options, such as using your Canadian Visa Debit to make instant deposits, using online banking and creating a payee, or setting up pre-authorized deposits. Most deposits are processed within 1 to 2 business days. Check if there is a minimum account balance that you need to meet.

How to make trades 

Here’s how to buy stocks online in Canada. Each online brokerage account may have slight variations, but here are the basics you need to know. 

Step 1: Look up the ticker symbol 

When you’re ready to make a trade, clicking on the “buy” button will take you to a page where you can search for the ticker symbol (an abbreviation of the fund’s name) or the name of the fund you’re looking to purchase. Click on the fund, and it will display some background information. 

Step 2: Calculate the number of units  

Here’s where you’ll do some simple calculations. In order to figure out how many units to buy, you take the amount of money you want to invest and divide it by the current stock price. 

Depending on your platform, you may have the option to put in a dollar amount that you want to invest and it will calculate the number of units for you. However, if you need to calculate it on your own, here’s what you need to do:

Let’s say you have $5,000 in funds that are available to trade and you want to invest in the Vanguard FTSE Canada Index ETF (VCE) with a stock price of $41.75. You’ll take $5,000 and divide by $41.75 which gives you a total of 119.76. You will need to round the number down as you can’t buy a partial unit. 

Also, you may need to factor in the cost of making the trade (up to $10 per trade). As the market fluctuates, you may consider setting a price type. For a safety net,  choosing “limit” and setting a limit price means that you don’t want to pay above a certain dollar amount. Don’t forget, if you’re buying a fund that’s priced in US dollars, you’ll also need to factor in the currency exchange rate. For these reasons, I would round down to 115 units so that there’s a cash buffer. 

Step 3: Verify the trading fee

Double-check that you have sufficient funds to cover the cost of making your trade. If you’re over your limit, it should give you a warning that you need to revise the number of units you can purchase. There’s also an option to choose a time limit on your transaction, which can be for the day you’re trading or in the future. 

If there are any trading fees, they should also be listed in your summary. When you’re ready to confirm your trade, you may be prompted to enter a trading password. This is an extra security feature to ensure that you’re the one who’s authorizing this transaction. 

Once you’ve placed your order, typically it will fulfilled within a few seconds. However, if it’s a very volatile fund and you’ve set a certain price limit, your order may not be filled right away. 

Step 4: Repeat until you’ve completed your portfolio 

Congrats! You’ve completed your first trade. As you can see, it’s fairly straightforward. There are more sophisticated features available in your account, which you can explore when you’ve got more experience under your belt. In the meantime, go back and repeat these steps to purchase the rest of your funds across your investment accounts (e.g. RRSP and TFSA) to build your portfolio. 

Mission accomplished: You’re a DIY investor

Now that you’re all set up, you’re officially a DIY investor! You should be very proud of achieving this milestone. In the next article, I’ll explain how you can monitor the performance of your investments and ensure you stay on track to meet your financial goals. 

It’s important to do it right—or you could face hefty taxes or penalties. Find out which investment accounts are best for your financial goals and how to create your own investment portfolio.

Types of investment accounts

In Canada, there are a variety of investment accounts that you can open. They all provide different benefits, and eligibility requirements, along with various tax implications. Here’s a high-level overview of these accounts. You can do further research to learn more about how they work based on the links below. All these accounts will allow you to invest in mutual funds, index funds, ETFs, GICs and more (which we’ll cover in the next section).

Registered Retirement Savings Plan (RRSP)

A popular investment account is the RRSP, where Canadians can save their money towards retirement until age 71. The main draw is the amount that you contribute will help to reduce your taxable income. The RRSP contribution limit is 18% of your income from the previous year.

Tax-Free Savings Account (TFSA)

The beauty of the TFSA is that the money you invest, any growth on it, will be tax-free. Thus far, the lifetime contribution limit is $88,000, if you have been at least 18 years old since 2009 (when this account first became available). The contribution limit for 2023 is $6,500.

It also provides flexibility when withdrawing your money compared to the RRSP. Keep in mind that the amount you withdraw in a given year, you’ll have to wait until the following year on January 1st to contribute back that amount.

Non-registered account

Another option to invest your money is through a non-registered account, which means the income earned and capital gains will be taxable. Any contributions to this account aren’t tax deductible. The upside is that this type of account doesn’t have any contribution or withdrawal limits. This may be a good option for those who have maxed out their RRSP and/or TFSA.

Registered Education Savings Plan (RESP)

If you have kids, then you may want to save for their post-secondary education. With the Registered Education Savings Plan (RESP), you can contribute up to $50,000 per beneficiary. Plus, if you contribute a minimum of $2,500 per year, you can receive a 20% match (up to $500) thanks to the Canadian Education Savings Grant (CESG). Fortunately, any capital gains earned within the account are tax-free.

First Home Savings Account (FHSA)

Since April 1, 2023, this registered account allows aspiring homeowners to save up for their first home. You can contribute up to $8,000 per year, for a total lifetime contribution of $40,000. Some financial institutions have started offering FHSAs while others are expected to launch this year.

Keep it simple

If you’re new to investing, you may choose to open one or two accounts to keep things simple—instead of trying to juggle multiple accounts. Most Canadians already have a difficult choice choosing between contributing to their RRSP versus their TFSA. So, unless you’re already maximizing your existing investment accounts, or you’re looking to save up money for your children’s education or for a down payment on a home, then you may consider starting out with a TFSA and RRSP.

How to create your stock market portfolio

Now that you know what type of investment accounts to choose from, the next step is to assemble your portfolio. Here are some tips to help you decide how to invest your money in the stock market.

Consider a mix of stocks and bonds

When you’re investing in the stock market, you can purchase different types of assets such as stocks (shares of individual companies) and bonds (also called fixed income). Generally, having a mix of stocks and bonds can match your risk profile.

What are the types of investment products can you purchase?

• Mutual funds – This type of investment contains a portfolio of asset classes such as stocks, bonds and other securities. Money is pooled together from individual investors, and a fund manager will manage the fund’s assets. It only trades once a day after the market closes. Beware of the fees as they can be expensive.

• Index Funds – This is a portfolio of funds that is designed to mimic the performance of a certain financial market index, such as the S&P 500 and is not actively managed. They typically offer lower fees. 

• Exchange-Traded Fund (ETF) – This is similar to a mutual fund, but the main difference is that it can be bought and sold on the stock exchange in the same manner as an individual stock, so the price can fluctuate. ETFs can be designed to track a particular commodity, sector or an index. Just like index funds, these fees are cost-effective.

• Guaranteed Investment Certificate (GIC) – This is a safe investments as you’re guaranteed a fixed amount of income over a specified period of time and you won’t lose your principal investment. Although, you typically have to lock in your money for a certain period, so be sure that you don’t need to access it right away.

Diversify your stock market portfolio

When it comes to long-term investing, you’ll want to ensure that you have diversification in your portfolio. It basically means putting your eggs in many baskets. If you put all your eggs into one basket and that basket tanks, then you’ll lose all your hard-earned money.

Invest globally vs. locally

You can diversify your investments by expanding beyond Canada and branching out to the United States and international markets. With human nature, we tend to have a home-based bias, meaning that we like to invest in our home country.

Don’t get me wrong, Canada is a wonderful country but if you think about it, most of the companies are clustered around financial institutions, energy, basic materials, and telecommunications. By investing in developed and emerging international markets, you’ll get exposure to other countries and companies that have their own specialties.

Invest in many sectors vs. several sectors

What’s more, you’ll want to consider investing in many sectors or industries as opposed to handpicking a few. The reason is that perhaps AI could be the hottest sector this year, but next year, it could be the healthcare sector that is booming. You never know and it’s almost impossible to predict accurately year after year. So, why not save yourself the stress and just invest in all sectors?

The way I like to think of it is when you go to a buffet, are you going to eat one item for dinner? (unless you’re the type who likes to feast on the crab legs or sushi!). Or are you going to choose a little bit of everything? As DIY investors, the world is your oyster, so go ahead and indulge in everything!

Be cautious with risky and volatile stocks

It wasn’t too long ago when cryptocurrency, NFTs and meme stocks were the talk of the town. It seemed like everyone was jumping on the bandwagon as a way to get rich quickly and FOMO was rearing its ugly head. Now we’ve seen the fallout of numerous bankruptcies and a plethora of financial scams.

Nowadays, AI is all the hype. Only time will tell which companies will last. If you want to try your hand at selecting a few hot stocks, consider allocating a very small percentage to risky and volatile stocks as part of your overall investment portfolio. This way, you can still play around with your “fun money” but you can still sleep at night knowing you’re not putting all your eggs in one basket.

Even for seasoned investors like myself, I dabbled in some bitcoin ETF (which I ended up selling at a loss because it wasn’t worth my time and energy to go on a rollercoaster ride of volatility).

Also, be sure you understand the implications of day trading in your investment accounts. For example, the CRA may audit you and charge you with hefty taxes if they find you day trading with your TFSA.

Your path to financial success

Hopefully, you have a solid understanding of the investment accounts and products that are available to you.  Now you can choose the ones that are best suited for your financial goals. Do your research to create a portfolio based on your risk tolerance.

Having a diversified portfolio, with low-cost funds and a long-term focus is key to becoming a successful self-directed investor. Remember, you always have the opportunity to change your selections if you find they aren’t suitable for you. In the next article, I will show you how to choose and open a brokerage account.

So, how are you supposed to figure out an easy way to invest while keeping costs down and without rebalancing your portfolio? Look no further as the all-in-one ETFs (a.k.a. asset allocation ETFs) may be the answer for you. We’ll explain what is an all-in-one ETF, which companies offer them and the benefits of having it in your portfolio.

What is an all-in-one ETF?

If you’re looking for a one-stop-shop solution to building your stock market portfolio, an all-in-one ETF may be a good choice. Essentially, an all-in-one ETF is a diversified fund that has an appropriate asset allocation, with low management fees and can self-rebalance.

Vanguard was the first to launch all-in-one ETFs into the Canadian market in 2018. Although some may argue that iShares came out with this type of fund back in 2007.

Typically, it will hold a basket of about six to ten funds with a certain percentage of equities (stocks) and fixed income (bonds). Plus, they provide diversified exposure to various asset classes and regions. In some cases, they may hold a tiny percentage in cash or crypto.

To give you an idea, the iShares Core ETF portfolios hold the following underlying funds with varying percentages based on which specific fund you choose:

Equities:

• Canadian equities (XIC)
• U.S. equities (ITOT)
• International developed market equities (XEF)
• Emerging market equities (XEC)

Fixed Income: 

• Canadian fixed income (XBB & XSH)
• Non-Canadian fixed income (GOVT & USIG)

There’s something for everyone— from conservative, moderate to aggressive investors. As such, they’ve become a popular choice amongst everyday investors based on their performance, attractive fees and convenience.

What are the benefits of an all-in-one ETF?

There are many advantages to asset allocation ETFs, including:

• Low fees – That means more money in your pocket
• Instant diversification – ETFs bundle a bunch of funds for you. Thus, it could save you from buying individual funds and racking up trading costs.
• Automatically rebalancing – They’re designed to keep the same ratio of stocks/bonds.
• Dividend payouts – Dividends are cash payouts you get for holding some ETFs. You can use the money to reinvest in your portfolio.

Overall, it’s a solid all-in-one solution for your investment needs that is often overlooked by investors.

What are the best all-in-one ETFs in Canada?

We’ve researched and compiled a list of the top Canadian companies that offer asset allocation ETFs categorized based on your investor type. The fund name, ticker symbol, and fees are listed in the table below.

BMO

Most notably, BMO Growth ETF (ZGRO) was voted as one of the all-in-one ETFs by MoneySense in 2023. The fees are cost-effective with 0.18% in management fees and 0.20% in management expense ratios (MERs). 

Fidelity

Launched in 2021, these portfolios are unique as they hold a small percentage in cryptocurrency. So, if you want to have exposure to this asset class without having to purchase it separately, this could be a suitable option. Compared to its competitors, it has the highest combined fees.

*Based on the chart above, it has an indirect management fee and a direct management fee, respectively.

Horizons ETFs

The ratio is different than its competitors with a 50/50, 70/30 split compared to the common 60/40 and 80/20 split. They currently offer the lowest fees, but you have only three portfolios to choose from.

iShares

iShares Core Growth ETF Portfolio (XGRO) and iShares Core Equity ETF Portfolio (XEQT) were also voted as one of the best all-in-one ETFs by MoneySense this year. They offer the same fees as BMO. If you’re an aggressive investor, these could be worthy contenders.

Vanguard

Even with slightly higher fees, the asset allocation is what attracts investors to buy Vanguard portfolios. Vanguard Growth ETF Portfolio (VGRO)’s track record over the past five years is worth considering for young, aggressive investors.

Which all-in-one ETF should I choose?

If you haven’t figured out your investor type where I discussed your financial goals, risk tolerance and asset allocation, be sure to review the article and find out your investor profile. It will help you narrow down which all-in-one ETF is most suitable for your financial situation. Some investors may decide to have an all-in-one ETF and set aside a small amount to handpick a few individual companies to invest in.

No matter which one you choose, know that they are all excellent choices and you’ll be setting yourself up for success in the long run. Remember, don’t feel like you’re locked into the decision forever. You always have the option to switch to a different ETF if you find that the one you originally chose isn’t a right fit for you.

Dan Bortolotti’s book, Reboot Your Portfolio is highly recommend for every investor to read. He mentions a strategy where you can buy all-in-one ETFs in all of your investment accounts such as your TFSA, RRSP and non-registered accounts.

Although it may not be tax efficient, it saves you the time and effort of rebalancing your portfolio from time to time. Of course, this strategy may not be for everyone, but it may appeal to those who don’t want to use a spreadsheet and manually calculate how much they need to buy and/or sell to rebalance their portfolio.

How to buy all-in-one ETFs

Buying all-in-one ETFs is easy and can be done so in a discount brokerage account, such as Qtrade Direct Investing. Once you have opened an account, you would purchase the ETF like a stock. That’s where you select how many units you want to purchase at the current price (ask price). For example, let’s say you want to purchase $5,000 of a single ETF that’s trading for $50. You’d be able to buy 100 units. That said, you also need to factor in any trading fees.

How all-in-one ETFs can align with your financial goals

All-in-one ETFs are one of the leading innovative products being offered in the Canadian market for the past five years. It’s still a relatively new fund and should be used more often by everyday investors. It’s a simple solution that rebalances on its own, offers cost-effective management fees, and diversifies with underlying funds.

It’s entirely up to you whether you decide to put all your money into an all-in-one ETF or to have it as a piece of your entire portfolio. If done correctly, it can be a nice addition to your overall investment strategy.

In the next segment, I’ll walk you through the different types of investment accounts you can open and how to assemble your stock market portfolio.

What are your financial goals with investing? 

Knowing what your purpose is when you invest your money is essential to your financial success. When you envision your future lifestyle, what does it look like? Perhaps you want to travel to different countries, become a homeowner or save for retirement. You can also separate them between short-term (three years or less), mid-term (three to five years), and long-term (more than five years) goals.

Take a few minutes to write down your financial goals. Make sure that they are SMART goals. Here are a few examples:

• Short-term: I want to go on a four-night trip to Bermuda next year which will cost me $2,500. I will save $156.25 per month for the next 16 months. I will have a separate savings account to save for this family vacation.   

• Medium-term: I plan to save $8,000 annually for the next five years towards the new First Home Savings Account (FHSA). This will total $40,000 to go towards a down payment on a one-bedroom condo. 

• Long-term: I plan to retire in 35 years. I will need $1.5 million to retire comfortably and become financially independent. I have an initial investment of $150,000. By contributing $255 per month for the next 35 years and with an annual compound interest of 6%, I will have a stock market portfolio worth $1.5 million.

Once you’ve decided what you want in your life, you can make a plan to achieve your financial goals. Becoming a DIY investor can help you achieve your financial goals faster. 

Calculating your time horizon

First, you’ll want to figure out your time horizon, which simply means how much time you have to invest your money before you need it. You can determine this by selecting an end date of when you want to reach your financial goal. For instance, if you want to build your retirement nest egg by the year 2058, then you will have 35 years as your time horizon. The longer you have to invest, the more you’ll be able to benefit from compounding interest. 

Assessing your risk tolerance

Another factor to consider is your risk tolerance. This is how much risk you’re willing to take when investing your money. The stock market constantly fluctuates. When it goes up, it may seem like it’s all sunshine and rainbows. 

But the real test is when the market starts tumbling down. How will you handle this situation? Can you stomach losses of -5%, -10% or even -30%? Looking back to March 2020, we witnessed steep declines in the -37% territory. When this happens again, will you panic and start selling your investments at a loss? Or will you “keep calm and carry on”? 

Your risk appetite will fall into one of these categories:

• Conservative/Low-risk: These are relatively stable and safe investments. They will have a slow and steady growth. You may have to lock up your money for a specific timeframe to receive interest payments. Examples include bonds and Guaranteed Investment Certificates (GICs).
  
• Moderate/Medium-risk: These are middle-of-the-road investments. They could have double-digit growth and losses. Examples include blue chip stocks and dividend stocks.
  
• Aggressive/High-risk: These are highly volatile and it’s not wise to put all your money into a single stock or sector. Yes, you can earn significant gains, but you could lose all your money overnight. Examples include speculative stocks, meme stocks and cryptocurrency. 

You can take this online quiz to see what your risk profile is. 

Determining your asset allocation 

Based on your time horizon and risk tolerance, you can choose your asset allocation—the ratio of stocks and bonds in your portfolio. Let’s take a look at a few scenarios.

David is a conservative investor who is nearing retirement in a few years. His portfolio has 40% stocks and 60% bonds. 

Lauren is a moderate investor with another eight years left to invest her money. Her portfolio contains 60% stocks and 40% bonds.

Kyle is an aggressive investor who is in his early 20s. His portfolio consists of 80% stocks and 20% bonds. 

Each person has a unique scenario and investor type. Ultimately, it’s trying to find the balance between taking on some risk—but not any more than you need to. 

Canadian Couch Potato model portfolios 

An excellent resource that provides asset allocation ETF examples is the Canadian Couch Potato website by Dan Bortolotti. 

About a decade ago, you would’ve had to choose several index funds or ETFs to create your portfolio. In recent years, all-in-one ETFs have been introduced in Canada. Dan explains how they work and how you can simplify your portfolio by owning these ETFs. It’s worth considering if you’re looking to simplify your portfolio, save fees, and the time it takes to rebalance your portfolio. We’ll explore this in more detail in the later part of this series. 

If you’re looking for a discount brokerage where you can start investing with low fees, consider opening a Qtrade Direct Investing account where you can get up to $150 in bonus cash.

Target rate of return 

Although no one can predict how the stock market will perform, when we look at the historical track record, the average annual rate of return is between 6% to 8%. Of course, past performance does not guarantee future returns. Even though the stock market has trended upwards over the years, you may want to be conservative with your estimates in case anything happens.

By investing today, you can reap the benefits of compound interest and enjoy higher returns than you would compared to keeping your money in a high-interest savings account or sitting in cash. That said, using a high-interest savings account such as EQ Bank is good for short term savings.

What is the difference between active vs. passive investing? 

Active investing is when you try to pick individual stocks in an attempt to outperform the market. Passive investing is when you build a portfolio of low-cost index funds or exchange-traded funds (ETFs) that follow the market or a benchmark.

Humans have egos and it’s not uncommon to believe you can select the best stocks. In reality, it’s difficult to outperform the market year after year. No one has a magic eight-ball to predict how the market will perform. So you can tune out all the news because it’s merely a distraction. Plus, actively trading stocks requires time to research and follow specific companies. I’m sure you’d rather spend your time with family and friends. 

That’s why instead of putting all your eggs into one basket, you should consider spreading them into many baskets. This strategy is called diversification. By doing this, the historical annual rate of return is between 6% to 8% per year. It’s a decent amount of growth where you can sleep well at night. 

ETFs and index funds are available from various providers, including Tangerine, Vanguard, TD, and more.

What is the difference between investing vs. speculating? 

How can you tell when something is an investment versus speculation? When people try to find that one stock that will outperform the market and benefit from enormous gains (remember, cannabis stocks, cryptocurrency, or Gamestop?), it’s a red flag and a sign that people are speculating. The rewards can be high, but so are the risks. When everyone is talking about it, it’s already too late to invest in that particular stock because the price will probably be at an all-time high. 

As boring and un-sexy as it may sound, plain vanilla index funds will suit most investors. Even Warren Buffet said, “By periodically investing in index funds, the know-nothing investors can outperform investment professionals.” Having a diversified portfolio and a long-term approach will help you withstand the ups and downs of the stock market and come out ahead.

But if you can’t shake off that feeling of trying your hand at stock picking, you can consider allocating a small portion of your investment portfolio (less than 5%) and call it your “fun money”. Then you can choose a stock to buy and see how it performs. Make sure that you’re willing to lose all of this money and not sweat it. 

What is your investor type? 

Whatever your financial goals are, you can reach them by investing in the stock market over the long term. Now that you understand your time horizon and risk tolerance, you can better formulate your portfolio’s asset allocation. 

Stay tuned for part 3 of the DIY Investing Series, where you’ll learn how to assemble your stock market portfolio.

This is a first article of a six-part DIY Investing series, which will span over the course of a few months. As a self-directed investor for a dozen years, I’ll be sharing some of my experience and expertise to guide you to become a DIY investor. 

Why you should invest in the stock market 

If you haven’t already started investing in the stock market, there are plenty of reasons why you should start now. If you have some money that you’ve saved up that’s sitting in a low-interest savings account that you don’t need to touch anytime soon (and you’ve got your emergency fund topped up), then you may benefit from investing it. That way, you can earn interest on your money and it will help you reach your financial goals much faster through compound interest and dividend payouts.

Before you start investing, it’s important to think about what your financial goals are. Perhaps you are looking to save for retirement, achieve financial independence/retire early (FI/RE), quit your full-time job, or start a family. Whatever your reason, investing your money is a great way to have money work for you and to grow your net worth.

3 ways to invest your money in the stock market 

Here I’ll explain the three common options for you to start investing your money. 

Using a financial advisor

If you’ve received an inheritance, windfall, or have a complex financial situation, going with a financial advisor may be helpful. They can sit down with you and provide advice on how to invest your money. However, be sure to check if they are tied to specific institutions or products and they should disclose upfront what their fees are. A fee-only advisor can be a good option if you want unbiased advice. 

Since it’s not an entirely regulated industry yet (anyone can give themselves a fancy title to sound legit), you’ll want to check that they have the proper credentials and can suit your needs. Since they make a living from fees, they typically only work with high net worth clients ($250K to $1M+) and their fees can be quite high. Ask for recommendations, referrals and interview several candidates before you make a decision. 

Going with a robo advisor 

With as little as $1,000, you can start investing with a robo-advisor. Typically you’ll fill out a questionnaire and an algorithm will assemble your portfolio. The fees are in the middle of the road: you’ll still need to pay the management expense ratios (MER) of the funds you buy and the cost of having a robo-advisor manage your portfolio for you. For some high-net worth investors, the provider may offer services of a human advisor. This option is a good choice for those who want to be more hands-off with their investments but don’t want to pay high fees with a financial advisor. 

DIY investing 

Becoming a self-directed investor can be a suitable choice for individuals who feel like they have good investing knowledge and want to have full control over which funds they hold in their portfolio and save on fees. Since you’re responsible for your performance, it’s important to keep your emotions out of the equation so that you don’t start tinkering with your portfolio. Your success will be based on your own decision-making ability. 

If you’re looking for a discount brokerage where you can start investing with low fees, consider opening a Qtrade Direct Investing account where you can get up to $150 in bonus cash.

What is compound interest?

Remember when you were a kid and you built a huge snowball? At first, it takes a lot of effort to get the ball going, but once it gets bigger, it gets easier to roll. That’s the same way compound interest works in the stock market. 

When you first start investing with a small amount of money, you’ll see your account grow slowly. Then the pace picks up and the money will accumulate at a faster rate over the long term.

In this chart below, you can see that if you were to invest $6,500 a year (the current annual TFSA contribution limit) with an annual interest rate of 6%, after 10 years it will be worth $85,675.17 when compounded yearly. Even though your total investment will be $65,000, you will have earned $20,675.17 in compounded interest. That’s why Warren Buffett called “compounding interest the 8th wonder of the world.” 

Year	Total investment	Yearly interest	total interst	Total value
1	$6,500	$0	$0	$6,500
2	$13,000	$390	$390	$13,390
3	$19,500	$803.40	$1,193.40	$20,693.40
4	$26,000	$1,241.60	$2,435	$28,435
5	$32,500	$1,706.10	$4,141.10	$36,641.10
6	$39,000	$2,198.47	$6,339.57	$45,339.57
7	$45,500	$2,720.37	$9,050.94	$54,559.94
8	$52,000	$3,273.60	$12,333.54	$64,333.54
9	$58,500	$3,860.01	$16,193.55	$74,693.55
10	$65,000	$4,481.62	$20,675.17	$85,675.17

How compound interest can help you grow your portfolio

Here’s a comparison chart showing how much your investment will grow annually, based on a certain monthly contribution and a certain annual interest rate. 

Please note: the following is for illustrative purposes only. There is no guarantee when it comes to investing as there are always risks involved. 

Amount per month	40 years @ 4% interest	40 years @ 6% interest	40 years @ 8% interest
$100	$116,106.38	$190,767.78	$322,107.93
$500	$580,531.88	$953,838.88	$1,610,539.67
$1,000	$1,161,063.76	$1,907,677.76	$3,221,079.35

In the diagram above, if you had a monthly investment of $100.00 at an annualized interest rate of 4% will be worth $116K after 40 years when compounded yearly. 

Bumping this up to $500 per month, at a 6% interest rate, your investment will be worth $953K.

For the super savers, if you invested $1,000 per month, at a 8% interest rate, you’ll have a jaw-dropping net worth of around $3.2 million after 40 years. 

You can use this compound interest calculator and plug in your numbers to see how much your investments can grow. This goes to show that the longer your time horizon (the amount of time you have to invest your money), then the more time for compounding interest to work its magic! 

The benefits of switching to DIY investing

As humans, it can be easy to sit on the fence and not make any changes. However, as I’ve illustrated above how much money you’re wasting on excessive fees, may be the tipping point for some of you to make the decision to become a self-directed investor. Plus, if you want to be in the driver’s seat to select your funds, then it’s a good reason to hop over the fence. 

When I decided to switch my mutual funds from one of the big banks over to an online brokerage, all it took was a few hours of my time filling out some paperwork, and mailing it in. Again, that was over a decade ago and technology has made it a lot faster and easier. 

Nowadays, you can fill out the paperwork online to expedite the processing times. Once you open an account with your new online brokerage, you’ll be able to transfer your money from your existing RRSP and/or TFSA. 

There are several ways to bring your money over. The most common method when you fill out the transfer form, is to checkmark the box to transfer in-kind so that it ports everything as-is to your new brokerage. It may take a few weeks, so you’ll have to be patient. Once this is complete, you’ll be able to start managing your investment portfolio and save on fees immediately. 

Make the switch and get started

There are many benefits when it comes to DIY investing such as minimizing your fees and being in control of your investment decisions. For those of you who are making the switch from a financial advisor or robo advisor to an online brokerage, then you’ve got your work cut out for you. If you’re willing to make the commitment to learn (which is why you’re here reading this!), then soon you’ll be able to reap the benefits of becoming a self-directed investor. 

Remember, you don’t need to know everything about investing—just the basics to get you started. 

You’ll always have the opportunity to make adjustments as you become a more experienced investor. Unlike a decade ago, there are so many options available to you. The key is to get started early so that you can take advantage of compound interest. 

The next part of this DIY Investing series focuses on learning about your investor personality type.