Investing on your own

May 8 2008 by Ellen Roseman

Maybe you’re fed up with your financial adviser. Maybe you want to try managing your own investments. How much time and effort does it take to be a do-it-yourself investor?

My current Money 911 series is about flying solo. I think the time is right for many investors to ditch their high-priced help and take over the work themselves.

It’s not so hard. Believe me, I have a self-directed account and I don’t look at it every day — or even every week if I get really busy. It takes less time and effort than you probably imagine to pick a diversified group of investments and adjust them periodically.

You need to find your own trustworthy sources of advice about investing. I’d welcome suggestions from DIY investors about the tools you find indispensible to managing your money without outside help.

Who do you trust? What books, magazines, TV shows, websites or blogs do you consult on a regular basis? Does your discount brokerage have good online resources?

I’ve received lots of comments about my ongoing series and I’m posting some below.


  1. Mark Yamada

    May 8 2008

    Wow RF, lots of good questions!

    Our firm, PUR Investing Inc. specializes in building all ETF portfolios for individuals using sophisticated institutional methodologies. I will try to respond.

    1. You are correct about new ETFs. There are 697 available to North American investors today and about 400 in registration. There are two broad categories that have emerged with the potential of confusing consumers. The purely passive indexes (to which you refer) and those with “embedded” strategies. The latter include the so-called “fundamental” indexes first associated with Rob Arnott and more recently the active indexes of Invesco. Here is a simple rule if you are looking to build a pure index portfolio: look at the fees. Any ETF with an MER over 0.45% likely has embedded strategies. There are exceptions with some international ETFs but avoiding higher costs is a pretty good guideline anytime.

    2. Most ETF sponsors fully replicate their indexes. This is good news for you because they are completely transparent which allows arbitrageurs to keep the value of the ETF close to the value of the underlying securities. The exceptions include the “enhanced” and “bear” ETFs that go up or down by a multiple of index movement daily. These “leveraged” ETFs usually replicate about 85% of the index and have swap arrangements with dealers for the balance of the exposure (enhanced) or swaps (bear). Is it possible that the sponsors would hold ABCP in an ETF? I suppose anything is possible, but those kinds of instruments make arbitraging the ETF with the value of the underlying securities very difficult, so are usually avoided.

    3. Currency hedging is expensive. Full stop. Over time, in theory, it is all supposed to even out. That’s a hard story to tell someone who invested unhedged in USD assets with Canadian liabilities over the last few years though!

    4. Sector ETFs offer tremendous flexibility for actively managing risk. We have found some persistent relationships that allow us to go long some sectors and short others (all using S&P 500 sector ETFs with short alternatives). But we have lots of historical data and some sophisticated algorithms to guide us. I wouldn’t recommend folks try this at home. However, going long a broad-based ETF and shorting a sector you hate, is a fairly effective way of reducing risk.

    6. Diversification is an interesting topic. We use risk budgeting to engineer optimal portfolios. That means we concentrate on risk diversification rather than asset diversification. The point is that broadly based ETFs are already well diversified. Uncorrelated risk between different asset classes is good but not the whole answer. An example are some hedge fund strategies that appear to offer uncorrelated returns but their risk is hidden. They often offer a modest premium in annual return but have a larger exposure to a catastrophic loss ! (If you want to embarass a hedge fund manager ask them what the skewness and kurtosis is for their fund or accuse them of having “fat tails” then be prepared to run!) We build portfolios with about 6 ETFs for clients with up to $150,000. There are risk diversification benefits to add more but costs are very important to us. As portfolios get larger (over $500,000), it is possible to introduce more including some used in active strategies.

    6. PUR Investing’s use of risk budgeting means that every portfolio is a “target date” portfolio. The risk of the portfolio is optimized daily (not traded daily) to the investor’s investing time horizon. The portfolio automatically gets less risky as the horizon approaches.

    7. Diversification by style is active management. Your earlier comments suggested that you wanted to avoid this. Your comment about USD fixed income is related to the exchange rate risk question.

    Here are a few simple guidelines that hopefully will help and not confuse:

    A) If you live in Canada and expect to spend $CDN, your portfolio should have mostly Canadian dollar assets. Unless there is a huge interest rate spread in the US, stay in Canada for fixed income.

    B) Look to the liquidity of the underlying holdings in an ETF. Some smaller sector ETFs may have some illiquid holdings that may jeopardize liquidity in a crisis. Most ETFs are very liquid despite low trading volumes because of the creation/redemption function, but stick with the larger ones to sleep at night.

    C) One never knows what the future returns of various ETFs are going to be, but you know their costs(MERs). Avoid the high cost ones even if they sound sexy and enticing.

    D) People buy equities to participate in the long term growth of an economy. Broadly based ETFs give you that exposure but you should hang onto them for the long term and don’t be spooked by short term shocks.

    E) Finally, when markets are down and so are your ETFs, smile. You can take comfort in knowing that you are paying much lower fees than those poor schmucks who are stuck in median fee mutual funds. Over 25 years, if you stay the course, you will save more than 1% annually over those poor slobs and will be able to afford 9 more years of retirement income. That will make you very popular with the “chicks” in the seniors’ bars!

  2. Four Pillars

    May 9 2008

    Music to my ears!

    I would suggest that the Canadian Business couch potato articles are the best resource for most Canadians to learn how to invest for themselves.


  3. brad

    May 9 2008

    The time horizon is key here. I think managing your investments for retirement is a very different kettle of fish than managing shorter-term investments.

    I am very comfortable managing my own investments for retirement, because so much research has shown that the “set it and forget it” approach of putting your money in index funds and leaving it there is the most effective long-term strategy.

    As retirement approaches, though, you’re no longer investing for the long term and you have to start getting smart about volatility, keeping ahead of inflation while reducing investment risk, and other more complex issues. That’s the point at which expert advice can come in handy.

    In my case I’d probably consult a few books and still do it myself, but I could see where some people would rather pay to have someone advise them during this period.

    As for short-term investing for income during your working years, which involves paying a lot more attention to what your investments are doing and where the market is going, I would probably hire an adviser for that. But that’s only because I have other things I’d rather do with my time than manage my investments.

  4. bylo

    May 9 2008

    > why isn’t getting an extra 1% or 2% extra return above the traditional indices just as important a factor?

    Can you guarantee that you can achieve an extra 1% or 2% returns over a simple, low-cost portfolio of broad-based index funds? (After tax?)

    Is it possible that the strategies that could get that extra 2% could instead underperform by 2% or even more? Perhaps many investors, especially novice ones, don’t want to take that sort of risk. Perhaps, if they get into regular habits of spending less than they earn and investing the difference, they don’t need to take on that risk either.

    Perhaps index investing is a whole lot easier than the financial industry would like us to believe.

  5. MFN

    May 9 2008

    Right on Bylo!

    Tony, you are right about 1-2% of extra return. But costs are a certainty, returns are not. Professional portfolio managers can’t seem to get that extra return with any consistency over time so if you can, you are onto something.

  6. Rob in Madrid

    May 10 2008

    One of the biggest problems, I think, for DIY investors just starting out is knowing where to begin. The second is where to find good READABLE information (anyone who’s tried to read Benjamin Graham’s books will understand that one). There are literally hundreds of books and newsletters out there.

    The two best resources I’ve found are Canadian Money Saver ( and The Dividend Guy blog (

    Both are simple, conservative and very easy to understand. If you’re an active or aggressive investor, you’ll find them a bit on the slow, boring side, but if you’re the average Canadian simply interested in where to park your RRSP funds, these resources will be invaluable.

  7. Onus Consulting Group

    May 13 2008

    Of all my criticisms of the retail investment industry, I’ll always hold out hope that the financial advisor profession will evolve in a noble manner. However, Ms. Roseman, you’re totally dead on: It’s really not that hard to be a do-it-yourselfer.

    The challenges, I believe, lie in comprehensive financial planning — not just picking investments, but financial, estate and tax planning…among other things. When Cary List, President and CEO of the FPSC (responsible for administering and enforcing the CFP designation), presented the results of surveys done recently, it undermined a great deal of respect I had for the CFP designation.

    One of the survey’s conclusions was that 40% of CFPs do a full financial plan for “most” of their clients (a number that has been declining through the years). 40%? Not even for all of their clients…but most? I wrote a blog entry conveying my disappointment at Mr. List’s reaction to such a conclusion. He said that it was “okay” and insinuated this downward trend was something we had to live with.

    To hear such a defeatist conclusion coming out of the President of a body that is supposed to represent excellence in financial planning is a little upsetting. If people aren’t getting full financial plans done for them after hiring a Certified Financial Planner, why shouldn’t they be doing it themselves?


    Original Blog entry (May 5,2008):

    It’s okay that Certified Financial Planners don’t always give full financial plans?

    The Investment Executive, Canada’s newspaper for financial advisors, published interesting results completed recently for the Financial Planners Standards Council. The Financial Planners Standards Council administer and enforce the ethical standards of the Certified Financial Planner designation. I thought I’d share some of the results (my commentary is in italics below):

    Of those surveyed:

    70% have used a financial planner

    Less than 10% used the services beyond investments that a planner can provide (ie estate planning, insurance, tax advice, etc.), although a majority of them are aware that these services exist.

    In 2006, 59% of CFPs provided financial planning to over half of their clients, which was a drop from 71% in 2004.

    97% of CFPs do full financial plans for at least some of their clients, while only 40% do so for “most” (that number was 13% higher four years ago).

    The conclusions presented today by Cary List, president and CEO of the FPSC, at the annual conference for the Canadian Institute of Financial Planners (CIFPs):

    Financial planners are still in the sales profession, as far as people are concerned. Furthermore, comprehensive financial planning is not so much a priority of the Canadian public. It’s the perceived lack of need [not lack of trust] that is the reason for this. Therefore, there has been a significant downward trend in CFPs administering financial plans to their client base.

    The article actually presented 8% as the percentage of those surveyed who don’t pursue comprehensive financial planning due to a lack of trust. Instead, it concluded that the “perceived” lack of need is the reason that clients don’t get this service done for them. The question I feel that should have been broached at the conference is what can be done to change this.

    Obviously, comprehensive financial planning is far better than hiring somebody to just sell investments. Are CFPs doing enough to present the full package? Intuitively, you go to a doctor, and they set the dynamics of the check-up. You go to a lawyer, and they give you their take of how your case should be pursued.

    It just seems natural to me that you go to a CERTIFIED Financial Planner, and you’ll be provided with a full financial plan. If for no other reason, then because it’s the profession and the professional that should dictate the standards, not an ‘out-of-the-loop’ public. Is it wrong to believe that it’s up to the Certified Financial Planner to set the pace for their service? Who will correct this perceived “lack of need?”

    “Maybe that’s not such an awful thing,” List concludes, as people have come to respect the CFP for other reasons.

    The article, itself ends with “…so List suggests perhaps it’s ‘okay’ that CFPs are not planning as much.” Now, this wasn’t a direct quote from Cary List, but the author’s interpretation of his remarks. That being said, quite frankly, I am a little concerned that Mr. List didn’t present this as a problem, commenting instead “Can we do something to reverse this trend or do we want to? Do we care?” and “…is this a trend that we just have to live with? Perhaps, maybe to some extent.”

    I would, intuitively, think that he should believe that 100% of CFPs should be providing “full financial planning” and not be relegated to a role of just selling investments.

    It is the standard that I’ve held the CFP to. As Onus Consulting Group has been indexing the advisor community and filtering out ones according to our stringent standards, it does disconcert me as we have held advisors with a CFP designation with a higher regard. This has a great deal to do with the great work of the Financial Planners Standards Council. To hear Mr. List speak in such a manner, I am a little concerned.

    I always felt if I heard such statistics being concluded in a survey, I’d be hearing this remark from the President of the FPSC, but here it is coming out of my fingertips:

    A downward trend in financial plans for the clients of CFPs? I think we can fix that.

  8. Cary List

    May 15 2008

    In response to the entry from Onus Consulting Group that references coverage of my presentation at the CIFPs conference in Orlando last week, let me say that the profession of financial planning is indeed evolving in a noble manner, but it is still evolving.

    My comments on the findings of several surveys conducted on behalf of FPSC, I hoped, would reveal just where the profession is in this evolution and that we must accept the realities of today to know how to work toward a future that continues to serve the best interests of Canadians.

    Canadians do benefit from good comprehensive financial planning. However, they also benefit from the advice they ask for of a CFP professional, even when that advice is not in the context of full comprehensive financial planning.

    In bull markets, many Canadians are not asking for comprehensive financial planning – this is a reality. The result has been that many CFP professionals are not providing comprehensive financial planning to as many of their clients as they were in the bear market years preceding.

    The surveys show planners are doing less comprehensive financial planning, yes. The surveys also show that CFP professionals are giving financial planning advice to more clients in smaller chunks and relating to specific financial issues that their clients want addressed.

    Are these professionals still serving their clients well, and better, because they bring to the engagement professional ethics and competence in financial planning? Yes, absolutely. And this is really what I was hoping to convey.

    Of course, we would like to see planners doing more planning and more clients asking for it and understanding its full value – but it is important to face up to the reality that this kind of behavioural shift won’t happen overnight.

    The good news is that there are CFP professionals out there, all of whom understand the big picture, who explain to their clients how all the pieces of their financial affairs fit together and who deliver competent and trustworthy financial advice to their clients in the smaller chunks they ask for. This is a dramatic leap forward in serving the needs of the Canadian public. It is no longer all about product.

    The profession has evolved, and to move it along even further we must keep working collectively – educators, the media, governments, FPSC, professional associations and CFP professionals alike – to effect the kind of changes that Canadians will embrace, and that will enhance their financial well-being.

    I’m pleased to see my comments provoked reaction. This is the kind of dialogue that I hope too will effect change that results in more clients seeking planning advice and more CFP professionals demonstrating its benefits.

    Cary List
    President & CEO
    Financial Planners Standards Council

  9. Brian Poncelet, CFP

    May 17 2008

    Hi Ellen,

    The Toronto Star recently headlined a sad story about a couple who were murdered in Brampton. They had no life or mortgage insurance. Their two children not only lost their parents but are now financially strapped. If the parents had been killed in a car accident, it would not made the news but the kids would be in the same financial position.

    Ellen, you have made some excellent points about costs etc. But even the most successful do it yourself investor faces the risk of spending his/her savings if there has been no planning to mitigate risk. This is called Risk Management, a topic few write about in the media.

    In addition to death, risk come in many forms. Your house may burn down, you become disabled, your car stolen and so on. People who do their own investing in order to save money rob themselves of valuable advice that is offered by the financial planner.

    A good planner does not simply take a client’s money for investments, but understands the client’s financial position, assets, liabilities, cash flow and goals. He/she offers solutions that work in concert with existing group benefits whose value is declining due to the rising average age in the work force and corporate needs to cut costs.

    While attempting to educate the do-it-yourselfers in order to save money on investments, the risk management discussion is being neglected. Are these individuals picking up pennies in the middle of Yonge Street with no regard to oncoming traffic?


    Brian Poncelet, CFP

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