DIY investing is booming, here's what you need to know to set off on your own – Financial Post

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Thinking of cutting ties with your financial advisor and crafting your own investment decisions this year? You have plenty of company.

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A recent report from global comparison site Finder.com found that a third of millennials, 21 per cent of Generation X and 11 per cent of baby boomers either plan to stop, or are seriously considering stopping, working with their financial advisors this year.

In an age of innovative, no-fee robo-advisors and Reddit threads that just might point the way to the next meme stock bonanza, it’s easy to understand why so many investors feel comfortable going it alone. In 2020, more than 2.3 million self-directed investment accounts were opened in Canada — almost three times the number opened in 2019.

You don’t need to understand every dynamic shaping every market trend to succeed as a do-it-yourself (DIY) investor. But there are some general principles you can follow that will hopefully keep you from making any regrettable decisions as you brace your portfolio for the year to come.

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The past is the past

According to an Ontario Securities Commission study released last year, 44 per cent of the DIY investors surveyed by the OSC said they opt for self-directed investing because they enjoy it.

But fun has been in short supply for investors since the latter part of 2021, when growth and tech stocks hit a wall. Inflation continues to nibble away at returns. Some analysts expect higher interest rates to be rolled out by central banks in the U.S. and Canada in the early months of this year.

DIY investors looking at today’s market need to recognize that 2022, like every year, is its own animal. Expecting equities to behave like they did in 2020 or early 2021, when the market was being driven by a unique confluence of government stimulus, hype and free time, is an error waiting to happen, says Chris Karram, managing partner at SafeBridge Private Wealth.

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“The reality is, in almost every scenario, that the winner last year is not ‘the one’ this year,” Karram says. “If you were to look at sectors, regions or otherwise over the course of a 20- or 30-year window, without question, it’s never the same sector, or never the same region, that wins three years in a row.”

The energy sector, for example, had been languishing for years until 2021, when higher crude oil prices and a sudden recovery in energy stocks helped drive the S&P/TSX Composite Index to its best performance since 2009.

Avoiding oil stocks last year based on their prior weakness feels like it would have been the right move, doesn’t it? But it would have resulted in missing out on one of the year’s tastiest rebounds.

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Keep your expectations realistic

Mark Yamada, president of PUR Investing, says investors often gravitate toward DIY whenever the market goes on an extended bull run and picking stocks looks easy.

“You did not have to be a genius” to pick winners in 2020, Yamada says. “You just had to buy something, and it would go up.”

That expectation still appears to be in effect for at least some investors, particularly those too young to remember the early 2000s dot-com crash or the 2008 financial meltdown.

“Gen Z have only seen the market go up, with the exception of 2020. And what they’re expecting from the market is really extraordinary,” says Yamada.

In a survey conducted by American financial services company Capital Group in March of 2020, millennial investors said they expect a 15 per cent annual return on their investments. Gen Zs said they’re expecting returns of 26 per cent .

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It’s a phenomenon Yamada attributes to young investors’ belief in “buying the dip.”

For perspective, the annual rate of return on the S&P/TSX Composite Index was 9.3 per cent between 1960 and 2020, according to an analysis by Morningstar.

Some experts expect future returns to fall well short of that figure. A recent Credit Suisse report says Gen Z investors, whom the bank defines as those born between 1997 and 2012, should be expecting annualized returns more in the range of two per cent in the coming years.

Could such a sudden reversal be possible after the strength the market has displayed in the past two years? Absolutely.

As Credit Suisse explains, in the 20 years leading up to 2000, the historical real annualized return on global equities had been 10.5 per cent. But from 2000 to 2010, the average was -0.6 per cent, thanks to the beating handed out by the Great Financial Crisis. Times change.

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“You never know what the return of the market is going to be,” Yamada says.

Get good intel

Watching GameStop’s stock slide more than 30 per cent in the last six months should have you wondering whether you should keep getting your investment advice from complete strangers on Reddit.

Investing for yourself requires a steady diet of information. Just be sure to check where it comes from.

“The challenge with today’s world, I think more than anything, is that everything has a bit of a bias,” Karram says.

Banks and investment firms can provide useful resources, but it’s also their job to sell you their own products. Certain websites and social media influencers promise insider techniques and stealthy stock picks, but they also want to sell you premium memberships and passes to expensive weekend seminars.

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“The average investor is going to have to really work hard to find unbiased advice,” Karram says. “It’s almost impossible to point anyone in the right direction, because whoever came up with great advice last year doesn’t necessarily have great advice this year.”

Whoever you’re getting your information from should have an extended track record of success that’s taken place in different market environments.

Know yourself

Even though both Karram and Yamada make a living advising people what to do with their money, neither discourages investors from going it alone.

“Good for them,” Yamada says. “They will never believe that the market is a difficult and complex place unless they actually experience it themselves. It’s better for them to get the experience of getting their knuckles rapped and their accounts buried when they don’t have very much money.”

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Both believe DIY investors need to have a solid understanding of who they are before placing any bets on the market.

“Are you the type of person that can make and stick to your investment decisions? Do you have the discipline and the execution to see them through? Or are you the person who needs advice and direction?” Karram says.

Investing for long-term success means investing strategically. You won’t be able to do that without knowing what you want and what you’re prepared to do to get it.

“Nobody,” says Yamada, “can know the psychology of an investor better than [they] themselves.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.