Self-directed investors, or do-it-yourself (DIY) investors, decide which investments they want to buy and sell, and when. They direct their investment strategy themselves.
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What is do-it-yourself investing?
Do-it-yourself (DIY) investing or self-directed investing is when you build and manage your own investment portfolio. In other words, you direct your investment strategy yourself. Some investors only use a DIY approach. Others may use a mix of DIY investing tactics and also use a financial advisor to manage some parts of their portfolio.
DIY investing is not limited to a specific type of investment product. As a DIY investor, you can invest in stocks, bonds, GICs, ETFs, and more. DIY investors decide which investments they want to buy and sell, and when. Typically, they use discount brokers and online trading platforms to make their trades.
DIY investing can be either active or passive. Active investing can involve a lot of buying and selling of investments. Active investors try to gain more when the market is up and to lose less when the market is down. Passive investors generally hold investments using a long-term approach. They try to match market performance rather than beating it, through strategies such as buying investments that track a benchmark index. Whether you’re a DIY investor who uses an active or passive approach depends on your investor personality and strategy.
Both saving and investing can help you meet your financial goals, in different ways. Learn more about the difference between saving and investing.
What are some advantages of DIY investing?
There are a few reasons why DIY investors choose to manage their investments on their own.
- Personal interest – Many DIY investors choose this approach because they enjoy investing. They may set aside a few hours per week to manage their investments and research the companies they want to invest in. This can also make it easier to invest in the types of products and industries that they are interested in.
- Potential for lower fees – Because self-directed investors can purchase investments and make trades through a discount broker, they will typically pay lower commissions and fees. However, this is because these brokerages don’t offer advice about the suitability of the investments.
- Convenience – DIY investors can trade online, which makes it convenient to buy and sell stocks and other investment products through a website or app. They also have access to research, stock quotes, trading information, and interactive investment performance charts. They can see how their investments are doing in real time.
- You don’t need a high minimum dollar amount to start – Some advisors have minimum asset levels they require before working with clients. By contrast, a DIY investor can start out with a lower investment amount up front.
Consider your risk tolerance before investing. How would handle losing some or all of your money? Risk considerations involve how much you invest, but how well you would be able to manage if your investment loses money.
What are the risks of DIY investing?
The risks of do-it-yourself investing can include:
- Potential to trade too often – Because online investing can be done relatively quickly, DIY investors can run the risk of trading too often. This can mean that transaction fees can also add up quickly, eating into potential investing returns.
- You do it all yourself – Self-directed investors do their own research, decide what to buy, monitor and decide when to sell. Ideally, this means developing and following a disciplined investment strategy that diversifies their investments. It takes time to develop the knowledge needed to make informed investing decisions, and it takes time to actually make those investments.
- Potential for impulsive or emotional decisions – When you buy and sell investments on your own, using your phone or computer, it can be easy to act impulsively. While market fluctuations are part of how the stock market works, ups and downs can lead investors to make emotional decisions, rather than sticking to their investing plan. Some investors may also be swayed by the fear of missing out (FOMO) and impulsively want to buy a hot stock. Find out more about behavioural insights and how to counteract your biases to make better decisions.
- Not having a plan – While many DIY investors enjoy it and find it convenient, they may also overlook the bigger picture. If you’re not clear on your goals, and don’t have a clear sense of how investing fits into your financial plan, then it can be harder to know whether you’re choosing the right investments for your situation.
More Canadians are choosing DIY investing. The CSA Investor Index report showed 45% of investors surveyed have a self-directed account. And a third of those investors opened their account within the previous two years of being surveyed.
What do you need to get started as a DIY investor?
As with other approaches to investing, it’s important to know a few things before you start. This includes knowing your broader financial picture as well your own investing personality. It can be helpful to:
- Know how much you can invest – Investing should always complement your other financial obligations including debt repayment, saving, and managing your budget. Have a look at your monthly budget to know how much money you have available to invest. Ensure you can cover your monthly rent or mortgage and other necessary expenses.
- Have clear goals – Knowing what you’re investing for will help you tell if you’re choosing suitable investments for your needs. Also consider your time horizon for when you’ll need the money. You can even go a step farther and make a financial plan, accounting for short-term and long-term goals and other needs, such as debt repayment or estate planning.
- Decide what type of account you’ll open – Investments need to be held in an account. The type of account you choose will depend on your goals. For example, a Tax-Free Savings Account (TFSA) can hold most kinds of investments, and be used for any type of goal. But other types of accounts are for specific goals, such as saving for a down payment using the First Home Savings Account (FHSA). Also, if you hold your investments in a non-registered account, with an investment broker or advisor, these accounts are not tax-sheltered. You’ll pay taxes on your earnings. Learn more about investing accounts.
- Check your savings – It’s a good idea to have some savings put aside as a financial cushion, whether to cover a surprise expense or for an emergency fund. If you don’t have any savings set aside, it might be worth focusing on building your savings before you start investing.
- Check your debt level – If you have high interest debt that you’re struggling to pay off, then it may be a good idea to repay this debt first. This is because the interest you’ll owe is likely to be more than the interest you’d gain from investing.
- Be cautious about where you get information – Many DIY investors rely on information from social media, but it’s important to look beyond social media posts for investing info. Social media posts are often limited in scope, and may often skew towards entertainment or advertising rather than being neutral sources. Consider other ways to evaluate companies before investing.
- Know your fees – Always check the fees involved in any investment. You may need to pay fees to set up an account, or to make transactions such as buying and selling investment products. When choosing a broker or investing platform, consider the fees involved for different types of transactions.
- Check registration – It’s important to check before you invest, whether you’re a DIY investor or someone who works with an advisor in person. If you’re receiving advice from an advisor, check to ensure they are registered to sell investments and give advice. If you’re investing using an online platform, check to make sure the platform is registered.
Discount brokers may provide information on their website to help you better understand different types of investments. Some discount brokers may also provide automated investment tools to help with financial planning or asset allocation. Learn more about working with an online investment advisor.
Summary
Do-it-yourself (DIY) or self-directed investing is when an investor builds and manages their own portfolio.
- Many DIY investors choose to manage their portfolios because they enjoy it and have time to devote to it.
- DIY investing also has the potential for lower fees and can be convenient for some.
- The risks of DIY investing include the potential to trade too often and to make decisions based on emotions.
- Before you start investing, consider your whole financial picture, including paying down debt and building savings.
- Be aware of the sources of information about investments and look beyond social media.
- Always check the registration of any investing platform or anyone giving advice.
