Online investing today puts more information, support tools and services into consumers’ hands making it easier and quicker to act on their financial market decisions, all at a lower cost.

Online brokers deliver savings through the self-serve automation of buying and selling stocks and bonds. More importantly, they have unbundled transactions from activities such as conducting and distributing financial market research, the traditional purview of full-service brokerage firms.

However, today’s Internet world is awash with a great deal of financial market information. If online investors require detailed reports or personal advice, they can subscribe to special online services or engage a personal financial advisor as needed. In this way, they can still enjoy overall savings because these costs are not built into their transaction fees.

But to make all this work, online investors must become better educated about how markets operate, where to find reliable information and how to keep track of their financial activities.

Although online investors are on their own, they are not alone. There is a large and growing community of information sources, support groups and service providers to meet their needs. But successful online investors, like online shoppers, need to pay close attention to the background and biases of the websites they visit.

Simply put, well-informed investors are more successful. Just as important as their own market knowledge, online investors also need to realize when they need help and where to find it.

Both rookie and veteran online investors should bookmark the Investor Education Fund’s site www.investorED.ca. Funded by the Ontario Securities Commission (OSC), the Investor Education Fund is Canada’s objective, non-profit source for information and tools to help consumers make better decisions when investing and managing their money. With investor education as a major part of its mandate, this site is the go-to source for demystifying how securities and financial markets operate.

As the Investor Education Fund’s site reveals, investing successfully requires the continuous juggling and balancing of many different factors. These include trying to learn more about the forces that cause markets to rise or fall, and the challenge of where to find timely and accurate background data and business intelligence on the Web. Equally important is controlling your own emotions – fear, excitement, disappointment – as you try to maintain a disciplined strategy for managing your finances.

After all, you are investing your money for special purposes – to fund retirement plans or university tuition, buy a new house or car or simply to enjoy life. The better informed you are about financial markets and how they work, the better able you will be to make your nest egg grow through online investing.

The key to successful investing is to create a long-term strategy and stick with it. That can be harder to do on your own than with an advisor who will help you stay the course. It takes time, discipline and real self-knowledge to be a successful do-it-yourself investor.

Direct from investorED.ca’s rich storehouse of financial market insights and research, the following summary of techniques and advice will help boost the confidence and comfort levels of online investors as they manage their financial affairs electronically.

PART I

5 steps to smart online investing

The do-it-yourself online investor must ask the all-important question: do you have the discipline, time and knowledge to effectively manage your portfolio? Self-directed investors have to do many of the same things a professional investment advisor does. Here are five tips to keep you on track.

2. Stick to a consistent strategy. How much risk can you live with? Decide if you prefer a more active or passive investing style. Then do some reading on how the experts invest. At first it may take some testing to find a strategy you’re comfortable with, but once you find it, stick to it. Patience is a virtue, especially in the stock market.
3. Maintain a good mix of investments. Studies show that a mix of different investments is vital to investing success. So start with a plan for asset allocation and stick to it through regular rebalancing. Most advisors recommend reviewing your portfolio performance and your asset mix at least once a year.
4. Do your homework. It takes time to invest. For some people, it’s a full-time job. Even if you are a buy-and-hold investor, you still have to follow the markets regularly. Some pundits say that if you are an active investor, it takes about an hour per week for every stock you are tracking. That includes the ones that you already have and the ones that you would like to have.
   Many online brokerages offer stock charting, personalized portfolio management and top-shelf research for their clients. But they don’t offer specific advice. After researching your own investment decisions and options, you will have to decide on your own whether you want to execute a trade.
5. Know your investment personality – and how to work with it. Are you a risk-taker or a risk-avoider? Do you find it hard to accept losses and move on? Or do you overreact to every little twitch in the market?
   
   Watch out for these and other factors that are part of your “investor personality”. Try to remain objective.

PART II

5 common investing mistakes to avoid

1. Developing an emotional attachment to your portfolio. Many online investors make this mistake. They ride stocks down for far too long and they don’t cash in their winners soon enough. Why? Because they feel a personal affiliation with a company rather than taking a detached, analytical perspective.
2. Chasing performance through “hot tips” or trying to time the market. Market timers and performance chasers often end up trading far too often and at a higher investment cost and risk. In a 2007 Online Investor Satisfaction Study, J.D. Power and Associates found that self-directed investors who make most of their investment decisions without an advisor are more likely to be active traders and choose riskier investments.
3. Putting too much money into a single investment. This is a very common pitfall for independent online investors. It’s also a costly one.
   A 2001 study looked at the performance of 40,000 independent investors’ portfolios. All had equity investment accounts with discount brokerages. Most had massively under-diversified portfolios.
   These investors tended to buy equities in large consumer products and technology companies with well-known names – the same firms you find in the S&P 500 index. How did this approach work out compared to the broad market portfolio? Not so well. Between 80% to 90% of these investors’ portfolios underperformed the market.
4. Under-researching investments or only choosing investments based on superficial information or a quick look at past performance.
   Investor publications and online chat groups are not always the best source of market information. The advice doesn’t necessarily take into account an investor’s personal financial goals, age, investment experience, tolerance for risk or current holdings. To choose a suitable investment, unadvised investors need to consider all of these critical factors.
5. Losing sight of the big picture, or the long-term plan. Self-directed investors often lack a solid financial plan to guide their investment decisions. Instead, they are largely driven by short-term market events. One study by Merrill Lynch found that only half of unadvised investors had a financial plan compared to 80% of those with advisors.

PART III

Choosing online tools and resources

There are plenty of investing tools available online for independent investors. Websites such as Investopedia offer helpful tips for online investing as well as analysis and charts. These tools can give you additional insight into investment opportunities. And, by making you better informed, you will be able to make better investment decisions.

5 websites to consider:

1. Agoracom – for small cap investors. www.agoracom.com
2. Bank of Canada – current and historical rate information on inflation, Canadian and U.S. interest rates and a currency converter to help convert 50 foreign currencies to and from Canadian dollars. www.bankofcanada.ca
3. Canadian Business Online – free resources for investors, including stock ratings, access to annual reports, stock tracker, articles. www.canadianbusiness.com and click on My Money.
4. Canadian Fixed Income – access to the price and yield information from CBID, Canada’s only electronic, multi-dealer fixed-income market. www.canadianfixedincome.ca
5. Globefund – useful fund information and data, with easy-to-use fund charting functions, a quick link to relevant Globe and Mail fund articles, and links to their monthly report on mutual funds. www.globefund.com

Remember: When researching your investments, set priorities so you look for the most important things first. Tracking down the most relevant information first – such as industry trends, corporate strategies, operational priorities and financial results relative to competitors – can save you a lot of work on investments that you will ultimately reject.

Also, beware of biased or unreliable sources. Are they trying to sell you something? Do your own due diligence on any and all trades you are considering.

PART IV

Dealing with your emotions

What is the biggest challenge for online investors? Volatile markets? Bad economic news? Unstable currencies? The answer may have less to do with market events themselves than with how you react to them.

When we invest, we’re not always as rational as we’d like to think we are. Research shows investors often make irrational investment decisions that work against their long-term goals. For example, we tend to give too much weight to whatever has happened most recently. When energy or bank stocks are hot, we follow the crowd and invest in them. After you have done the proper research, going against the flow may be a better long-term strategy.

To keep your emotions out of your portfolio, especially when you don’t have an advisor at your side, watch out for the following:

• Fear of regret. Some people have trouble taking action when it’s time to sell an investment. The fear of making a mistake – and of having to live with it – can be paralyzing. And it doesn’t matter whether you have a losing investment or a winner. People tend to hold on too long, trying to avoid the emotional discomfort of regret.
• Fear of losing money. These investors can’t keep their long-term perspective when faced with surprising or upsetting short-term events. They focus too closely on daily market events and the fear of losing money that market volatility can produce – forgetting that the long-term effect will likely be insignificant.

Such fears lead to a number of ineffective attitudes and behaviour. These include:

• Denial: Often, investors will deny there is a problem with a choice they have made. They become paralyzed and are unable to take corrective action. Denial can accompany the other emotional pitfalls listed below.
• Anchoring: Here, investors let their most recent experience dictate their financial decisions, even if it is contrary to their overall strategies and investment goals. For example, they may take an emotional position (or anchor), such as “mining stocks are the place to invest” or “it’s better to stay out of the market until things settle down.”

They may have some good initial results following this line of thinking, but if they hold onto this tactic long after the market shifts, they may wind up missing out on new opportunities.

Successful investors allow their tactics to reflect their strategy, rather than allowing their tactics to change their strategy.

• Overconfidence: This is a very common pitfall for solo investors. People often have a tendency to overestimate their abilities. Blinded by overconfidence, they fail to take into account many of the complicated environmental and emotional issues inherent in stock market investing.

There’s always a fine line between taking action and overreacting – between staying the course and getting stuck in a position. Online investors need to keep their emotions out of their portfolios so they can make objective decisions based on the facts.

PART V

Improving your return by controlling fees and other charges

Online investing helps lower commissions and other fees in three ways. First, you usually pay only for your transactions, not for investment advice. Second, since online brokerages have lower costs than full-service companies, they can charge less. And finally, competition among online brokerage firms also helps drives down fees.

To keep your investment charges under control, check out the fee structure before opening an online investing account and bear in mind that:

• Costs vary from company to company. Even if the fees you pay an online brokerage are lower than those of full-service brokers, they can still add up – particularly if you do a lot of buying and selling. Shop around and compare trading fees before opening an account. Each online brokerage firm must post a schedule of all its commissions, fees and service charges on its website.
• Costs are not always obvious. Some online brokerages impose a number of other fees and charges beyond transaction fees. Some have extra fees for postage, issuance and delivery. Before you open an account, make sure you know all the charges you’ll have to pay.
• Costs are less important than value for money. Many online brokerage firms that charge slightly higher commission fees may offer more or higher-quality tools and research services to their customers. If those tools and services deliver extra investor support and value, they may be worth the additional cost. Investors must watch for minimum balance requirements and maintenance fees. Sometimes firms with lower commission fees make up the difference by asking for a higher minimum balance.

Always remember: The advantages of cheaper online trading fees begin to erode if you make poor investment choices or trade frequently. Cost alone should not be the only factor in deciding to invest unadvised.