Money & Career

How to be your own investment adviser

Take a DIY approach to investing with our handy tips

1. Take charge of your money
Investing in the stock market without an adviser may seem risky, but even experts don’t always know what the market will do next. “People think their adviser has some special insight into the stock market, but that’s not true,” says Ian McGugan, the editor-in-chief of MoneySense magazine. “There’s absolutely nothing wrong with buying stocks or mutual funds yourself but you must put in the time to do research.”

2. Learn the fundamentals
If the term ETF makes you think, WTF?, it’s time for a crash course in money basics. Check out Investored.ca and Investopedia.com for basics, or deepen your knowledge with books such as William Bernstein’s The Four Pillars of Investing and Charles Ellis’s Winning the Loser’s Game. Or take a course through continuing education.

3. Decide what you want
“If your goal is to buy a house in five years, then you need to know that the money will be there then,” says Diane McCurdy, a Vancouver financial planner and the author of How Much Is Enough?. Short-term investments (less than five years) are better suited to vehicles like guaranteed investment certificates or the new tax-free savings accounts. But if you’re in it for the long run, consider stock-based investments.

4. Go couch potato
The essential strategy for newbies – and the time-challenged – is so-called couch-potato investing. Buy a selection of index funds, which are a type of mutual fund, and exchange-traded funds (ETFs), which are securities that trade on the stock market.. Index funds and most ETFs track a market index, such as the Canadian S&P/TSX Composite Index, which means they contain a portion of all the stocks in that index. One advantage to this strategy is its low cost: Both index funds and ETFs typically have fees of less than one percent of your purchase, while mutual fund fees, called management-expense ratios, can go as high as 2.5 percent. Another plus is the minimal time commitment. “We’re talking about 15 minutes a year,” says McGugan, who adapted the strategy for Canadian investors in MoneySense magazine.
There are two families of ETFs to choose from in Canada: iShares and Claymore. You can buy index funds through a discount broker (most banks have offer one) or from mutual fund companies or credit unions. For specific portfolio recommendations, visit Moneysense.ca.

5. Consider stocks
Yearning to be more hands-on? Try the stock market, but it’ll cost you – and we’re talking time, not money. You need to do your research: Visit Globeinvestor.com, Finance.yahoo.com or Finance.google.com. Look for stocks offered by companies with low debt, high cash levels and seasoned management teams. If you’re risk-averse, financial consultant Lesley Scorgie suggests blue-chip stocks, such as those of banks and utilities. “These are companies that pay dividends and have stable returns even during market downturns.” More of a risk taker? Consider resource- and commodities-based companies, like oil and gas. “They tend to get hit the hardest,” says Scorgie. “But they also tend to be the ones that recover the most.”
Experts suggest that about 20 stocks across five sectors will give you a diversified portfolio, which means you’re invested in companies that vary in terms of geography, size and sector. And while it’s a good idea to have some stock investments for growth potential, you should also keep funds in fixed assets (such as cash or bonds).
This route requires a commitment of several hours a week to stay abreast of company news and analyst reports to help you decide your next move. Knowing when to sell is the toughest call of all, says Ellen Roseman, a personal finance columnist at the Toronto Star who teaches investing courses at the University of Toronto. “You have to learn when and how to sell.” She advises putting a stop-loss order on stocks, which means if they drop below a certain price, your online broker program will automatically sell.

6. Mull over mutual funds
Not ready for the time commitment of stocks, but want to be more active than a couch potato? Go for mutual funds, though they may not perform as well as stocks. As with stocks, you need to consider risk tolerance and diversification: McGugan suggests a mix of no more than five funds. Be sure to watch out for those with pricey fees, and think about selling if the fund begins to underperform relative to its peer group over several years or if the manager leaves. Research funds and track performance at Morningstar.ca and Globefund.com.