Posted on Tuesday January 07, 2020

Do-it-yourself investing: What you need to know first

Did you watch an interview with Warren Buffett and find yourself inspired by his charisma and the prospect of making a fortune buying and selling stocks on your own? Before you can become a seasoned investor, take note that a lot of learning lies ahead. We spoke recently with Daniel Bergeron, Director, Wealth Management at UNI, and Mutual Funds Representative at Credential Asset Management Inc., to review the path you need to follow to set yourself up for success as an independent investor.

Assess your risk tolerance profile before proceeding

This is likely the most crucial step in the process. After nearly 10 years of continuous growth, many investors have never personally experienced a major market correction.

Daniel Bergeron: “That said, all you have to do is look back a little more than 10 years ago to the financial crisis of 2008 to see portfolios that everyone considered sound lose up to half their value within a period of a few weeks.” 

It’s at times like these that people see the real-life impact of their investor profiles. Most people who invest in the stock market do so as part of a diversified portfolio. If you’re thinking about investing significant money and managing it yourself, it’s important to educate yourself fully first and make time in your schedule for studying the markets on an ongoing basis.

Are you ready to live with the uncertainties of the stock market and take significant risks in hope of maximizing your returns? Or does even the thought of watching your savings lose value—even temporarily—give you the cold sweats? Freedom to access the financial markets whenever you like positions you to take advantage of interesting opportunities more quickly. However, even if you already have specific companies in mind that you want to invest in over the short term, take the time to evaluate your profile carefully before proceeding with any transactions, and ask yourself the following questions:

1. Your emotions: What is your risk tolerance? Are you capable of detaching yourself from the situation and adopting a more long-term strategy that could include losses that are often temporary but could also be permanent? Or do you prefer the security of certain products potentially offering lower returns but also lower risk (or in some cases being fully guaranteed!)?

2. Your goals: What is your investment horizon? Are you expecting to work for another 20 years or longer before you retire, or are you hoping to cash in your investments within the next two or three years?

3. Your values: Are there companies and types of investments that you would not feel comfortable supporting? Investing is a powerful way of expressing your values. Investors nowadays are increasingly interested in ethical issues and want to know exactly what types of activities the companies in which they choose to invest their money are involved in. Take the time to think about what’s important to you.

Define a short and long-term investment strategy

A sound investment strategy is your best protection against the inevitable fluctuations of the market.

Daniel Bergeron: “Diversifying your portfolio between safer investments and rising stars and between stocks and bonds and distributing your funds across multiple industries and geographic areas helps to reduce your risk.” 

Once you’ve identified companies and securities of interest, decide on the price you’re willing to pay so that you can target entering the market at the right time. Consider meeting with a Credential Asset Management Inc. advisor or Credential Securities advisor at UNI for advice in this regard.

Use a simulator for a few weeks to test your skills, and then invest only a small portion of your portfolio

Many sites offer the option to experiment with a simulated portfolio for a period of time to test your knowledge and investment strategy. This is an excellent way to get familiar with the tools available to you and the general workings of the stock market. The Qtrade Investor trial account is a good option. Start by investing only a portion of your savings rather than the entire lot. Emotions play a major role in investment decisions, and the learning process is less painful if you risk only a fraction of your assets to start.

Daniel Bergeron: “Beware of investment advice you hear at the local coffee shop! Although your friends may have good intentions and their suggestions may even prove accurate, nothing can take the place of a thorough risk analysis prior to any significant investment.”

Choose a platform that is simple, straightforward and offers real-time results

Websites and applications abound for tracking market prices and conducting transactions online. While some appear to provide these services at minimal cost, it is wise to review their terms and conditions carefully to avoid any potential (unpleasant) surprises. Some offers are limited-time only, and the regular price or annual fees may end up being much higher than anticipated. Many people end up being hostages of a particular application because they don’t want to have to start over from scratch learning a new app. Through online investing with Qtrade Investor,* available through UNI, you can get real-time quotes and conduct transactions without any minimums or overhead fees; you simply pay commissions on an as‑you-go basis.

Avoid succumbing to the lure of day trading

Any number of websites and countless blogs offer advice on buying and selling various securities. Although many of them are highly respected, such as Business Insider, published by the American businessman Henry Blodget, and Bespokeinvest, which is led by seasoned analysts, many others are operated by unscrupulous types wanting you to invest in overvalued companies.

Daniel Bergeron: “Many bloggers promise outrageous returns by following short-term buy and sell strategies, sometimes within the same day (day trading). These types of investors must have extremely high risk tolerance and frequently depend on sheer luck. Remember that you are more likely to make money following a long-term strategy based on yield from solid, well-established companies. The frequent, large-scale trading of penny stocks is a very high-risk strategy, and bloggers rarely share the details of their failures. If you’re still new to trading, I would avoid tossing the dice with your entire life savings!” 

Qtrade Investor* offers analyses carried out by the highly reputable research company Morningstar directly through the UNI site. You can find out at a glance whether a company of interest is considered overvalued (or also possibly undervalued) based on the company’s actual financial performance, not just the word on the street.

The best advice to give someone who wants to manage their own portfolio is to proceed with caution. Do all the tutorials, read everything you can get your hands on (from reliable sources!), and start out by investing small. Over time, you may eventually become a seasoned investor and achieve your objectives.

* Online brokerage services are offered through Qtrade Investor, a division of Credential Qtrade Securities Inc., member of the Canadian Investor Protection Fund. Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. This article is provided as a general source of information and should not be considered personal financial or investment advice or solicitation. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete.