THE BLOG

Taking Your Finances Into Your Own Hands

11/18/2013 12:40 EST | Updated 01/23/2014 06:58 EST

If you want a thing done well, do it yourself -- a phrase coined by "the little corporal" Napoleon Bonaparte. Of course it didn't exactly work out well for him in the end. Still today, many of us try to tackle life with that attitude, putting our DIY skills to the test on various projects, from home improvement, to car repairs and even financial management.

With self-directed investment accounts, discount brokers, free online financial tools and an overabundance of online personal financial advice, it may seem like consumers today are well positioned to manage their own financial path.

But access to tools doesn't necessarily mean one has the skills to use them properly. Anyone can buy a pair of scissors for $10, but most of us aren't cutting our own hair these days, and with good reason.

The rise of self-directed Investing?

In Canada the number of online/discount brokerage accounts has steadily risen from 3.1 million in Q1 of 2008 to 4.7 million in Q1 2013, according to stats from Investor Economics. While investors have clearly demonstrated an interest in opening their own online/discount accounts, DIY or self-directed investing is more than simply picking stocks online.

Like all good financial management, self-directed investing involves the nitty-gritty research and management that comes with handling investments. The ability to access financial knowledge is easier than ever, and with social media and blogging, any investor can know what the Wall Street executive, hedge fund portfolio manager or financial oracle is thinking.

With up-to-date leading research, programs to model investments, and ability to side-step full-service brokerages or money managers, self-directed investing seems like the optimal way to grow one's savings. But like most things, there are downsides and limitations.

For instance, trading and maintenance fees can hurt your portfolio, even if you are avoiding management fees. And while access to financial research is extremely helpful, it doesn't mean one has the know-how or time required to understand the implications of what they're are reading.

Many people turn to the self-directed route in an effort to boast their coffers through their own financial skills. However those that do not have a sufficient level of investment knowledge or discipline may be doing themselves a financial disservice by discounting the role of the professional advisor.

Although people will argue the 2008 financial crisis undermined the financial expertise of the investment industry, it proved how complex the financial sector can be, even for those on the inside.

The risks involved in managing your own investments are not always readily clear. It comes down to not only your ability to understand finance or buying and selling shares, but your emotional ability to objectively manage risk, understand asset allocation and exposure to certain asset classes during volatile times. It is much easier to invest when the market is in an upswing, but navigating a downturn is something people are often completely unprepared for.

Staying on track

Whereas financial knowledge and enthusiasm are great attributes, the following points will help every self-directed investor to stay on the right track:

Understanding financial markets

• It may seem obvious but if you are going to take charge of you own finances, you better make sure you have the know-how to manage your money effectively. If you are going to be your own investment advisor, you need to read important financial documents and a company prospectus in order to select suitable investment opportunities and recognize potential risks.

Understanding of your investment goals

• It's easier to achieve what you want if you have a clear target and this is no different when investing. Your investment strategy and approach will differ depending on whether you are saving for short-term or long-term goals. The amount of time you have to invest and the level of growth you hope to realize will influence the type of assets you should choose and the level of risk you should take.

Understand your risk tolerance

• As Warren Buffet explains, risk comes from not knowing what you're doing. This is especially true for self-directed investors and is best measured by one's ability to handle investment loss. Unfortunately, risk is a fundamental part of investment management; as a self-directed investor you need to understand the level of risk (potential loss) you are willing to take in the hope of longer term gains.

Understand where to invest

• Creating a suitable asset allocation based on investment goals and risk tolerance is the Achilles heel of many self-directed investors. Investing across a range of asset classes that are aligned to your overall objectives is a vital step for any DIY investor. By diversifying your money across different investments, you can help reduce short-term investment volatility and increase long-term growth. As the saying goes: Don't put all your eggs in one basket!

Understand that you may need help

• For some, managing their own investments is the way to go, for most it is a time and labour-intensive path where the benefits don't necessarily outweigh the costs and commitment. Demands from our careers, family and the other aspects of our busy lives mean we have limited time required to be our own full time financial manager.

For those who do decide to go it on their own, it may be wise to see a fee-based advisor to get objective advice on your investment strategy approach. Fee-based advisors charge up-front hourly rates for their time and can help you map out an investment plan that you can implement on your own. However, if you feel you have the ability, time and discipline to manage your own investments, you may be quite capable of making the right decisions without the help of an advisor. Like everything else in investing, one size does not fit all.

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