With more and more people going online and taking greater control of their financial portfolios, what should investors consider and be aware of as they become do-it-yourself investors?
Michael Macdonald, head of strategy and business development with RBC Direct Investing, believes there are six main strategies that online, do-it-yourself investors should be aware of and implement in order to achieve success.
The first is to understand and set your financial goals.
“It’s important to have a goal in place that you want to achieve,” said Macdonald.
“Know where you want to get and how much you have to achieve to reach that end.
“That will in some degree determine the investment choices that you will make.”
The next is to determine your investor profile.
An investor profile or style defines your preferences in investment decisions.
There are several different types of investors.
Investors looking for security want to know their original investments are secure and will accept lower rates of return for that security.
Income investors, however, want investments that will provide them with steady cash flow on a regular basis and maintain consistent value.
Balanced investors are comfortable with risk but want a significant amount of diversification to balance their portfolio; conservative investors will take on a little more risk for slightly higher returns; growth investors are comfortable with higher levels of risk and generally invest for the long term to get the most out of the market; and high growth investors want to see their money grow as much as possible.
Most banks, financial advisers and online brokerages will have questionnaires that will show you which type of investor you are. Many of your financial decisions will follow from the type of investor you determine yourself to be.
Next, understand your investment choices. Determine whether your investments will go into registered, tax-sheltered accounts or into no-sheltered ones.
Canadians are well acquainted with registered retirement savings plans (RRSPs). What they may not know is that investments outside of registered accounts such as RRSPs can be critical to maintaining a balanced financial strategy, and have some beneficial tax advantages as well.
The advantages of investing in registered accounts such as RRSPs and registered retirement income funds (RRIFs) is that the money is only taxed when the funds are withdrawn. RRSPs also offer a tax reduction when you make a contribution.
Favourable capital gains tax treatment has resulted in non-registered accounts becoming a more attractive option for investors. Capital gains made on equities held in a non-registered account are taxable at only 50 per cent of the individual’s marginal tax rate.
In general, if you’re investing for the short term, you should look at a non-registered account because if you pull money out of your RRSP before it expires, for example, you pay a tax penalty. Your non-registered account should contain equities and dividend-paying stocks, compared to interest-bearing investments such as guaranteed investment certificates and bonds in your RRSP, where the gains are considered employment income and are taxed at your marginal rate when they’re withdrawn.
Banks and other discount brokerages have lots of research, reports and information available to help online investors understand principles such as diversification, the myriad of investment products on the market and to build their portfolios.
As well, they may have telephone call lines where investors can call for help and information and to execute orders at a fraction of the cost of a full brokerage. However, the majority of online investors today are actually executing orders online themselves, Macdonald said.
Once you’ve built your portfolio, you should monitor it regularly to ensure it stays in line with your goals and guidelines.
“Unfortunately, this is the strategy that many investors forget about,” said Macdonald. “Investors are becoming more price-conscious and aware of value for money. They’re realizing that you have to be actively involved and you can’t simply build your portfolio and leave it sitting (unattended) in a shoe box.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.