The investment industry has evolved – that’s a great thing for investors. We now have more choices than ever before regarding where, how much, and how often to invest our money. With more choices available to us however that can mean tougher decisions and more information for any retail investor to navigate. Money decisions can be scary. It’s hard to know who to trust.
Today’s post will provide an overview of self-directing investing (a path I’ve chosen) – thanks to a reader question and their request for input.
Reader to My Own Advisor:
Big fan of your site and the thought-provoking insights you provide regularly. My husband and I are ready to take control of our investments. As you can imagine, it’s daunting. Some of the challenges I’m having is the process to get more control of our accounts. I appreciate how direct you are on your site and the use layman’s terms to avoid financial jargon.
The plan is to be in control of our investments by July of this year. Any overview or suggestions are appreciated.
Thanks for the kind words about the site. I cannot offer direct investing advice, for many reasons, but I can take a walk down memory lane. Today’s post will highlight how I got into self-directed investing, what key accounts I use, and some considerations for you.
What is self-directed investing?
Terminology and definitions are important, so let’s start with those. For the purposes of this post self-directed investing could apply to an account, or your style of investing, or both.
Example: for one, you can own a self-directed RRSP. Remember the RRSP (Registered Retirement Savings Plan) is an account, not an investment. So, this February, don’t tell others “I need to buy RRSPs” before the RRSP deadline for the 2016 tax year. You don’t buy RRSPs. You put money into this account (or take it out). Like coins going into a piggy bank, consider the RRSP the piggy. The coins can be your different investments.
There are many different types of self-directed accounts: RRSPs, Tax Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs), Registered Retirement Income Funds (RRIFs) and more.
Two, self-directed investing can be how you invest. Meaning, you may prefer to invest on your own (as I do), in control of your own investment choices inside various self-directed accounts. Slightly contrary to the terminology though you can be a self-directed investor and get some help too. You can have a financial advisor or even a robo-advisor to help you with investing decisions.
On that note, all investors need some help, now and then, at one time or another. So don’t misinterpret self-directed investing with never needing any help. We all learned from someone, somewhere, sometime.
OK, there’s your primer. Let’s move on to how I started, some considerations for you, and how I invest now when it comes to self-directed investing.
Self-directed investing – the beginning
I wasn’t always My Own Advisor, and I don’t mean this site. For many years, throughout my 20s actually, I owned big bank mutual funds inside my RRSP* – in what was called a mutual fund RRSP account at my big bank.
*TFSAs were not around in my 20s.
Although I knew there were other ways to invest (i.e., own stocks, bonds, GICs, etc. inside my RRSP) I chose to invest in mutual funds because a) it was easy, b) I was used to it, and c) there were no transaction costs to buy more mutual fund units every few months with money contributed to my RRSP. It seemed like a good deal…
What I learned however over time: my big bank mutual funds were costing me lots of money in money management fees – money I would never see again. This ultimately led me to quitting the mutual fund industry**.
**Mutual funds are not bad per se but I believe pricey mutual funds costing >1% in money management fees are. Remember – the money you pay in management fees is the money you can’t keep, you can’t invest nor grow for yourself.
After reading blogs, books and more I learned there was a better way to invest including what accounts to own, how best to contribute to them, and furthermore what to invest in them.
Self-directed investing – the considerations
Over a few weeks, many years ago, I slowly transferred my RRSP account (and my wife’s account) over to become self-directed RRSP accounts. The process included selecting the big bank discount brokerage I wanted to invest with, based on a number of criteria; and completing the requisite paperwork to transfer account assets.
Here is some of the criteria and questions I answered back then, and what I would suggest you to consider today, if you’re curious about running self-directed accounts:
- Investment consolidation – Investors who are dealing with many different financial institutions may have duplication across their investments. In money terms, duplication = wasted money. Self-directed accounts allow investors to see “the big picture” and avoid “diworsification” across their portfolio. Consider consolidating financial assets – for investment purposes – under one financial firm. It doesn’t have to be your big bank. There are many options available to investors.
- Fees – Investors should be mindful of any and all money management fees they pay to own investments. Again, I can’t say it enough: the money you pay in fees is money you’ll never see again. Do what you can to avoid making someone else wealthy with your money.
- Administration – Investors may or may not want to be in control of all financial decisions. To that end there are dozens (if not hundreds) of financial companies ready to help you manage your money. These include accounts with big bank discount brokerages, accounts with robo-advisors, and accounts with independent money management firms. Consider how “hands-on” you should be with your self-directed investments and how “hands-off’” you should be as well. This is not a trick question or statement. If you don’t know the answers, in rather comprehensive detail, you should strongly consider some financial professional support. This is not a bad thing – as long as you are mindful about #2 and #1 above.
Self-directed investing – the current
You might already know from reading my blog – I consider myself a hybrid investor. I invest in many Canadian dividend paying stocks for dividend income AND I invest in some low-cost Exchange Traded Funds (ETFs) for long-term growth.
This is how we’ve decided to invest. Your mileage may vary.
Using this hybrid approach we consider ourselves self-directed investors with self-directed accounts.
As self-directed investors we are working on maximizing contributions to our registered accounts first. We rebalance our portfolio by adding new money and buying assets that have lagged in price. We try and avoid selling any assets regardless of how far their prices may fall. If anything, we try and celebrate falling prices – we buy more of what we own. We avoid financial headlines of doom-and-gloom and euphoria alike.
The things we focus on in our self-directed accounts are keeping:
- Our contributions, steady
- Our investment costs as low as possible
- Diversification across our investments (i.e., investments from different sectors and countries)
- Tabs on any taxable concerns.
We save, we invest, we reinvest (money paid to us from our investments) and we rinse and repeat. That’s pretty much it.
Self-directed investing may or may not be right for you. Owning self-directed accounts however can provide a number of strategic benefits, including investment consolidation, a lower-cost fee structure, and ease of administration to name a few. Consider your investing goals and financial objectives before making any major financial decisions. If in doubt, please discuss all money matters with a financial professional.
Got a question or looking for a perspective? Send me a comment or an email. I’d be happy to consider it for a future blogpost.