Are we there yet?

Deciding to manage your own investments can seem like a wise financial decision when your returns have been low, your fees constant and your financial advisor has had nothing new to say for the past six months. At first blush, the process doesn’t even seem that complicated: pick some good investments, spread it around a bit and let time do its thing, right? Maybe not.

First you’ll to decide if you want to buy individual securities or managed investments (mutual funds, ETFs). From there you decide on an asset allocation that works for your risk tolerances; most people would fall into the balanced category but if you're younger and more aggressive you might decide on an all growth portfolio; if you're completely risk averse you would lean to the other extreme. Think of it like buckets.

Now that you’ve decided who’s going to manage your money (you or them), and how much you should put into each of the asset class buckets, it’s now time to think about where you put the money from each bucket. You’ve read that the best way to protect your investments is to diversify them; so you start there.

With bonds, you will need to decide on credit quality (investment grade versus junk debt), terms to maturity (1 year to infinity), geographic location (Canadian bonds, US fixed income securities, global or emerging markets), and lastly do you want to pick the bonds yourself, hire a mutual fund manager to make the decisions for you, or simply buy an index ETF and let time work for you?

Stocks require similar questions to be answered: dividend or growth; large cap or small; Canadian and/or US? If you want exposure to foreign markets (other than the US) do you use mutual funds, ETFs or will you venture into direct ownership using ADRs (American deposit receipts)? Also to be considered with each position is the sector weighting: how much energy; do you want exposure to mining; a big tech weighting given its importance; what about biotech and pharmaceuticals? This is easier to manage with individual securities as you generally know what they do, inside of funds or ETFs it takes a little more digging to understand their sector weightings. If you elect to use funds, how do you know which ones are the best: do you use their 1 year performance numbers, three years or five years? Is the annualized rate of return more important than the calendar returns? What are the MERs on these funds; are the performance numbers net or gross of fees; are the fees deductible?

Finally, we’re at cash, this should be the easy part you think: money market funds, premium savings accounts or short maturity term deposits? How much liquidity do you need; cash at the ready or do you have other sources if you need to dip? Do they charge management fees on money market funds, are there transaction costs? What is the settlement: same day, one day or three days? If it’s a term deposit can you get your money when you want? If so, is there a penalty for taking it out early, can you take just a little or do you need to sell the whole position? What about treasury bills or commercial paper, do they pay more than the other cash equivalents?  So much for easy.

This is all before you’ve actually bought the investments. Then you need to think about fees: whether you buy or sell, it will cost you money: if not directly in the form of commission are there imbedded fees, is there a spread? What about annual account fees: RRSPs, RRIFs, TFSAs and RESPs, will you be charged each year or will they wave it based on a minimum balance? If you’re buying individual securities, do you feel confident putting in market orders or should you be concerned about liquidity and trading volume? Do you do a day order, a limit order, all-or-none or a fill-or-kill? What do you do with partial fills if you’re putting in limit orders? Buy the balance tomorrow and pay another commission or do you raise your price so you get filled today? So let’s say we get through all those decisions; what now, can we relax and let the magic of buy-and-hold take over?

Or do you need to watch them? Should you use stop losses to protect your downside? Sell it all when it hits the target price (you used research, right?), or do you take profits and move back to your original weighting? What about the tax consequences of the trades? Do you have losses you can carry forward or is there some positions that would best be forgotten and you can sell those for their losses?

These are the questions you need to be able to answer if you are going to manage your own money properly. Sure, you can ignore most of it and hope for the best - sometimes that works, at least for a while. In the end, managing your money is like any other endeavour: there is right way and a wrong way. Problem is, if the DIY shed from Home Depot that you built in the back yard falls apart, life goes on; if you mismanage your financial future, the long term ramifications are considerably worse.

So, my advice? If you’re going to do it yourself make sure you cover all your bases, do your homework and have a discipline; otherwise, leave the driving to some who will.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.