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Investing on your own

Determine why you want to invest on your own

  1. You should be aware that if you think you can make a higher return than what you would by entrusting your savings to a professional, you will have to take higher risks. Do you want to invest on your own so you will pay lower commissions and trading fees?

    One strategy some people use is to simply invest in a few exchange-traded funds in order to diversify their portfolio and pay low management fees.
  2. Do you find it fun to manage your portfolio or do you simply want to learn how the financial markets work? There are trading simulation contests that let you test your investing skills without having to risk your money, such as the Bourstad competition.
  3. Do you want to speculate and earn a quick profit?
    Be cautious and begin by investing small amounts that you can afford to lose if things don’t work out. Many investors have tried this approach and lost a lot of money.

Know what types of investment are available

To be able to choose suitable investments, you must know their features. To understand an investment, you must know the risk, liquidity and potential return, including fees and taxes.

Determine your investor profile

If you have already made investments, a representative probably asked you to take a test to determine your profile. If that information is up-to-date, you can use the results.

Determine whether you will be an active or passive investor 

An active investor frequently looks at his portfolio to check whether his investments still meet his objectives. Some people review their portfolio several times a day (day traders) while others look at it once a week.

A passive investor chooses his investments and keeps them for a long time, such as one or more years. This is important in choosing your dealer. Some dealers offer attractive packages if you trade a lot and others if you have a large balance in your account, such as $50,000 or $100,000. 

Determine your asset allocation and prepare an investment plan

Asset allocation is the proportion of your portfolio you will invest in each class of securities. For example, you may decide to invest 35% in Canadian equity, 20% in American equity, 10% in foreign equity, 30% in bonds and 5% in more liquid assets. The asset allocation you choose will depend on your investor profile. For example, if your profile is cautious, the proportion of equity in your portfolio will be very low or nil. Your asset allocation should also take your investment horizon into account: will you need your savings soon or in 20 years? If you need your money within the next few months, you should invest in liquid and possibly low-risk assets. 

An investment plan will help you:

  • Avoid panicking and selling when the stock market falls sharply.
  • Avoid keeping certain securities too long.Assess your management rationally.
  • Avoid costly errors, such as copying what your neighbour invests in, buying a stock simply because an analyst recommends it, etc.

Determine the amount of risk you can tolerate

You should then choose your securities according to the maximum risk you can tolerate. In assessing risk, you should take account of your portfolio as a whole. For example, will you hold investments that could increase in value while others could lose value? Will you use options to protect yourself against a drop in the stock market? Or will you limit risk by having few risky investments?

Choose the types of investments in which you will allow yourself to invest and, conversely, determine what types of investments you will not invest in.

For example, do you want to only invest in a few exchange-traded funds which could diversify your portfolio or would you rather invest in common shares of companies you choose? Will you invest part of your portfolio in bonds, preferred shares or Treasury bills? Will you use derivatives?

A few points to keep in mind:

  • Take account of the tax consequences. If you have several accounts, put interest-bearing investments in registered accounts, such as an RRSP or a TFSA. If you have unused contribution room, you can add investments that will pay dividends and earn capital gains.
  • Diversify your portfolio.
  • Bear in mind the fees, such as the commission for buying or selling a security, the cost of opening or closing an account, etc
  • When you want to buy a security, write down why you want to buy it, how long you expect to keep it, at what price you think you’ll sell it, whether it pays a dividend and if so, the yield, etc. When you sell it, you can check whether your target was reached and, if it wasn’t, why not.
  • Indicate how much you could earn on no-risk and low-risk investments. You can then determine whether it’s worth risking your money to earn slightly higher returns.
  • Have you built a portfolio? Periodically re-evaluate the securities you own. Are the prospects for your securities still good? Is it time to sell? Is it time to buy more?

Choosing a dealer

To invest on your own, you will need a dealer to execute your buy and sell trades. The dealer will have a website where you can make your trades. Not all web platforms are the same: some are more user-friendly than others. Before you choose, check the websites of the dealers you’re interested in to see how their platform works.

Check the trading fees. They vary considerably from one dealer to the next. Also, check the quality of its customer service. Is it easy to reach? Can you communicate with a representative in the language of your choice?

Check whether the dealer is registered with the Autorité des marchés financiers.

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