Why Self-Directed Investing and Online Brokers Are Right For You

Self-directed investing is easy if done right

Investing doesn’t need to be complicated. A well-diversified investment portfolio that protects your wealth against inflation and generates a respectable return is relatively easy to assemble. 

With the help of an online broker, or even a robo-advisor, you can create a solid investment plan that will help you achieve your financial goals – and with minimal risk. There’s no need to spend a fortune on pricey financial advisors and software.

Yes, investing can be complicated – and even intimidating. But these domains are typically reserved for highly knowledgeable and motivated individuals seeking to earn returns that vastly exceed those of the market. 

These individuals include day traders who fanatically scrutinize stock charts to predict how a stock might move in the next five minutes, quants with PhDs who develop sophisticated trading algorithms, and value investors who conduct exhaustive research of publicly traded companies, with the hope of finding the next Facebook before its stock price skyrockets.

Most people have no intention of devoting themselves full-time to the financial markets. Their goals with investing are typically to build up a sizable nest egg for retirement and have sufficient income to maintain their desired lifestyle. These attributes may also describe you, and that’s perfectly okay – you don’t need to be a market wizard like Michael Burry, Warren Buffet, or Jim Simons.

Perhaps the most straightforward yet elegant investment strategy you can adopt is investing in index funds. 

Index funds are investment products that track a specific stock market index, such as the S&P/TSX Composite Index. The goal of an index fund is to mimic the returns of an index. Investment fund firms accomplish this feat by investing in securities according to their weighting in the index. 

For example, suppose Shopify currently makes up 7% of the S&P/TSX Composite Index. In that case, the fund manager will direct his trading team to purchase enough Shopify shares to match this percentage in the index fund they oversee. 

Index funds are excellent investment vehicles because they provide broad exposure to the financial markets, enabling you to diversify your portfolio correctly. By including index funds in your portfolio, you’re simultaneously invested in hundreds, if not thousands of stocks. There’s no need to monitor your portfolio closely and evaluate which stocks to acquire and which ones to dump – you’ve already purchased the whole market! 

The simplicity of index funds is the primary reason for their enduring popularity. It’s a passive investing strategy that requires little oversight from the investor and few trades each year to keep it running.

With the help of an online broker, you can select from a wide array of index funds: domestic large-cap equities, international small-cap equities, short-term domestic bonds, long-term international bonds, etc. Then, you can set up fixed monthly deposits that will automatically invest in the index funds you’ve chosen. This consistent deposit strategy is called dollar-cost averaging.

You may need to do some periodic balancing every quarter or so. Still, for the most part, it’s a low-maintenance investing strategy. Just set it and forget it!

You get more control and flexibility

DIY investing with an online discount broker or robo-advisor provides you with complete control over how you invest and manage your portfolio. You can pivot your investment strategy whenever you wish, experiment with different products to enhance your returns, and employ creative tactics to minimize your risks.

There’s a whole assortment of investment strategies and philosophies in the investing world – and a financial advisory firm can’t be an expert in every aspect of each one. Each financial professional you approach for investment advice will have their biases, preferences, and expertise. Should you allow them to manage your investments, they’ll likely do it in a way that feels most comfortable for them, rather than you. 

Financial advisors may pressure you into staying the course with your current portfolio when it’s apparent that changes are needed. Or they may attempt to sway you into allocating your funds to investments you believe aren’t in your best interest. 

With self-directed investing, you can make decisions independently, without having to appeal to an advisor who may disagree with your reasoning, thus avoiding drama and conflict.

Your investments are aligned with your goals and values

When investing on your own, there’s a high probability you’ll occasionally blunder, especially when markets are volatile or a recession ravages the economy. But even when your portfolio experiences some turbulence, you’ll at least have peace of mind knowing each decision you make aligns with your goals and values.

Most investment professionals are highly skilled and ethical people who do everything in their power to meet their clients' needs. But there’s always the risk of a conflict of interest emerging. 

Investment advisors are motivated by money, like everyone else. There’s nothing nefarious about this, as everyone has bills to pay and families to care for. However, some advisors may be motivated to only maximize their revenue, even at your own expense.

For example, your financial advisor may attempt to convince you to purchase investment products that will net them the highest commission. Many advisors are compensated as a percentage of the sales they generate for their firm. Not surprisingly, they have a powerful incentive to promote expensive products, which may not be appropriate for you in every circumstance.

Investment professionals often face immense pressure to generate returns on clients’ portfolios that exceed the market, or at the very least, the returns of their competitors. This intense rivalry is especially true with mutual funds, where fund managers are judged on their performance quarterly and annually. Their compensation, often in the form of lucrative bonuses, is often tied to these periodic metrics, as well. As a result, they may prioritize investment strategies and tactics that favour short-term gains. 

Unfortunately, most investors are looking to realize returns over the long term, so there's a clear misalignment of goals and incentives between them and the advisory firms managing their money. This conflict of interest could inevitably lead to meagre returns or sizable losses in clients’ investment accounts should it persist for too long

You pay nearly no management fees

One of the most enticing benefits of DIY investing is the costs you can save from minimizing management fees.

Investment management, like any other service, comes with a price. Most financial advisors charge a management fee that ranges from 1% – 2% of the value of your investments. So, if you have a portfolio worth $100,000, you could pay anywhere from $1,000 to $2,000 per year in fees to your advisor. You’re obligated to pay this fee whether you realize a return on your investments or not. 

At first glance, these fees may seem trivial, but over the long run, they can erode a considerable chunk of your investment portfolio’s value. The reason for this is because not only is your balance reduced by the annual fee, but you lose the opportunity to generate compounded returns on those fees. 

For example, suppose you invest $50,000 with an asset management firm that charges a 1.5% fee per year based on your portfolio’s total value. You decide to contribute $500 per month to your portfolio for the next 25 years. 

Let’s assume your investments grow at 7% annually. At the end of 25 years, your portfolio will be worth $505,247. Sounds nice, doesn’t it?

However, the truth is that you could have earned a superior return were it not for the 1.5% management fee. Had there been no fee, your balance at the end of the 25 years would have been $662,893. The management fee would end up costing you $157,646 during this time frame – nearly 24% of your portfolio’s value!

In addition, there are other fees you may have to contend with should you choose to hire an advisory firm to manage your investments. These include commission fees, wire fees, sales loads, account maintenance fees, transfer fees, and many others. Over time, these fees can quickly add up, further eroding your portfolio's balance.

Should you choose to manage your investments on your own with the aid of an online brokerage, you can escape or dramatically reduce these fees. As a result, you'll realize higher returns over the long run.

While online brokers do charge fees, they’re negligible compared to what traditional asset management firms typically charge. Most online brokers impose a small fee on accounts with a balance of less than $25,000, but it’s only around $25 per quarter, which works out to be only 0.4% per year. Plus, if your balance is high enough, they may reduce your fee or even waive it altogether. 

Online Brokers have low transaction costs

Anytime you execute a financial transaction, you must pay a transaction cost to the broker, who facilities it. In the past, transaction costs were steep, to the point that retail investors’ returns would get wiped out if they engaged in too much buying and selling of investments. Quite simply, the cost of maintaining an investment portfolio was prohibitive. Only investors with a substantial net worth could justify the transaction fees.

Today, things are much different. If you’ve been paying close attention to the stock market in 2021, you're likely familiar with the mania that enveloped GameStop. The buying frenzy that erupted around this firm's stock was made possible in part due to the low transaction costs charged by investing apps, namely Robinhood. The affordability of these platforms enabled anyone with a few bucks to spare to partake in the chaos.

The transaction fees Robinhood charged were not just exceedingly low – they didn’t exist, period!  That’s right. You can now trade stocks for free.

Though Robinhood is not currently available in Canada, you can open an account with Wealthsimple Trade, a self-directed trading app offered by Wealthsimple. The trading platform charges no transaction fees on both the purchase and sale of stocks and exchange-traded funds (ETF). It holds the distinction (for the time being) as the only broker to offer commission-free trading in Canada.

Other discount brokers charge transaction fees, but they’re relatively small compared to their full-service counterparts. For example, Questrade only charges between $4.95 and $9.95 for transactions involving stocks and selling ETFs (purchasing ETFs is free). If you’re adamant about minimizing your transaction fees, opening an account with an online broker is a no-brainer.

Start investing with little to no money

DIY investing is no longer restricted to the wealthy elite. Gone are the days where you needed to amass tens of thousands of dollars to open an investment account with a broker or asset management company.

Today’s online brokers cater to virtually anyone who aspires to manage their investment portfolio. For example, the minimum deposit to open an account with Questrade is only $1,000. Even better, Wealthsimple Trade and Virtual Brokers have no minimum deposit requirement.

As with transaction costs, low or zero initial deposits have made investing affordable and accessible to more consumers than ever before. Suppose you feel apprehensive about your first foray into DIY investing. In that case, you can start with a small sum of money to gain some experience and build your confidence gradually. You no longer need to risk your life savings to begin your investing journey.

Gain access to popular investment options

By embarking on your investing journey on your own terms, you gain access to a much more extensive universe of investment products than if you entrusted your money with a financial advisor who works for an asset management firm.

Each asset management company has its investment philosophy and a series of strategies to manage clients’ portfolios. Depending on their templates and guidelines, they may restrict clients’ access to a narrow pool of investment products. If you’re interested in allocating a portion of your portfolio to an asset class or specific investment they don’t deal in, you’re out of luck.

With DIY investing using an online broker, you have an abundance of options at your disposal. You can refine, tweak, and alter your portfolio as you see fit. Are you keen on adding obscure and emerging investments products like cryptocurrencies to your portfolio? Do you want to purchase fractional shares of stocks? Are you looking to load up on zero-fee ETFs? All these options and more are at your fingertips today – there are endless portfolio customization possibilities.

Depending on the online broker you choose, you can put your money to work in:

• Domestic and international equities
• Domestic and international bonds
• Options
• Commodities
• Cryptocurrencies
• Initial public offering (IPO) equities
• ETFs
• Guaranteed investment certificates (GIC)
• Over the counter (OTC) assets
• Futures
• Foreign currencies
• Mutual funds

By having greater access to the plethora of investment products available in the market, you can tailor your portfolio to better align with your goals, objectives, and risk tolerance.

In addition to personal and margin accounts, most online brokers offer you the ability to manage your investment in various tax-advantaged accounts, such as Registered Retirement Savings Accounts (RRSP), Tax-Free Savings Accounts, Registered Retirement Income Funds (RRIF). So not only do you retain complete control of your portfolio, but you benefit from generous tax savings, as well.

Benefit from sophisticated analytical and monitoring tools

To evaluate investment opportunities, optimize your asset mix, and gauge the direction financial markets might be headed, you need access to timely and accurate data.

In the past, getting hold of the information need to make sound investing decisions was time-consuming and fraught with difficulty. Even when you were able to acquire it, analyzing it to extract meaningful insight was cumbersome.

Today, online brokers provide investors with platforms with a wide variety of tools to analyze investments, measure portfolio performance, and conduct extensive research. While it's true that some brokers offer a minimalist setup and limited features, many go all out and provide users with an impressive arsenal of analytical and portfolio monitoring tools. Depending on your broker, these can include:

• Real-time streaming quotes. Real-time quotes allow you to view the exact price of a security at any moment in time.

• Screeners. These tools enable you to scan and filter for stock, bonds, ETFs, and other assets according to your specific criteria, saving you valuable time.
• Alerts and watchlists. Receive instant notifications about a security’s price movements to identify favourable trading opportunities.
• Portfolio tracking. This suite of tools allows you to gauge how your portfolio is performing and provides suggestions for enhancements. You can compare your portfolio against various benchmarks, indices, and hypothetical portfolios.
• Research centres. Garner the latest and most valuable news and analysis that pertains to the investment products you hold in your portfolio and use it to conduct detailed fundamental analysis. 
• Technical Analysis. Perform detailed technical analysis using various charts and indicators to determine where a stock’s price might end up in the future based on current price and volume action.
• Education. Some brokers provide a vast library of educational materials to help you become a knowledgeable and skilled investor. These may include webinars, videos, blogs, glossary of financial terms, FAQs, and more. You may also have the chance to practice with trading simulators and paper trading accounts to test your investing strategies and hone your trading skills.

Final thoughts

As you can see, there are numerous benefits to striking out on your own as an investor using only the services of an online broker. You’ll benefit from lower fees, have access to a wide range of investment products, and have the freedom to customize your portfolio to your exact specifications. 

Before you dive into the world of DIY investing and online brokers, you should step back and assess what type of investor you are or aspire to be. Are you content to merely employ dollar-cost averaging and purchase a few index funds to hold for the long term? Or is your goal to beat the market and realize above-average returns on your portfolio?

If the latter describes you, you must be prepared to devote considerable time and effort to crafting, testing, and refining your investment strategy. 

Your approach to investing will also influence the online broker you choose. Suppose you're looking to implement a basic, no-frills investment strategy that requires minimal trading and rebalancing. Selecting a broker that offers the cheapest fees, few analytical tools, and a clean, user-friendly interface will likely be the ideal option for you. 

On the other hand, let's say you anticipate designing a more sophisticated portfolio with complex investment products that require constant supervision and adjusting. You’d be better off with a broker that provides more features and access to a broader array of products, even if it means paying more.

The fusion of finance and technology has made DIY investing entirely accessible for the average retail trader. Online investing platforms are becoming increasingly sophisticated, but at the same time, more user-friendly and cost-effective. There’s never been a better time to get into DIY investing.