The DIY Investor Playbook for Canadians

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Investing isn’t taught in school but it should be. Our lives are all around work until we retire, but what about retirement? Personal finances, taxes, and wealth management are all topics that should be included in our education. The financial aspect of our future is too important to leave to chance.

According to a survey done by the government of Canada, 30% of Canadians believe they will never be able to afford everything they want. All because money and its different financial vehicles aren’t part of their education. In this playbook, I’m going to explain how you can be a DIY or self-directed investor.

Disclaimer: I am not an investment professional, and this is not investment advice.

My Investing Background

I started investing four years ago with a financial advisor. The most important aspect of this partnership was my financial literacy. Since then, every time I discovered something new about personal finances/investing, I wanted to learn more about it.

I invested $500 over the course of a year, trying to understand how the market was reacting, while testing different types of trade and learning about stocks.

However, it felt like I was gambling. I had a few stocks bought without any real reason, trying to beat the market. I felt that having the majority of my money invested with a financial advisor was not making the gamble any less random.

I couldn’t see investing with a financial advisor as risky as investing by myself. I realized later that it’s pretty much the same thing. Portfolios are built using public data accessible by pretty much anyone else, with a blind guess about your risk aversion.

Let’s be honest, everyone says that they are ready for riskier stocks with higher rewards, but when stocks plummet — their tone changes.

Today, I’m going to present to you the DIY Investing Playbook. I wrote this playbook based on my experiences of becoming a DIY investor myself. I truly hope you’re going to get tons of value from this guide and hopefully start investing yourself!

Before Investing

A lot of experts out there have given their opinion on the subject, but a general suggestion is to pay off your high-interest debts before investing.

Why you might ask? If you have a credit card debt with 20% interest and you’re not paying it before investing, you’re throwing an axe on your potential investments. Let’s say that you have a credit card debt of $5000 and you’re paying 1% of your balance + interest each month ($133 per month).

It’s going to take 5 years to pay off your debt and you will pay over $2900 in interest only.

If you invest in the stock market to get a return of 7–8% but you still have a high-interest debt, you’re cannibalizing your potential returns because of this huge interest. Do the smart thing and start with paying off your credit cards.

It’s important to understand how to manage your money first before thinking about investing. If you know how to budget and get familiar with your cash flow, you can do whatever you want with your money. Lay out the financial goals you’re trying to achieve and the timeline of these goals.

Investing can be a sustainable plan for you to follow, depending on what your goals are. You should align your financial goals with your investing goals.

How to Understand your Risk Tolerance

Everyone acts differently when they start losing money. Financial experts ask you a series of questions to understand how risk averse you are, but the thing is that it’s not set in stone. If you invest money for three years and you need to withdraw it for a project, it’s not going to be easy breezy if you’re facing a big loss at the end of year two.

The question is how are you going to react when you see volatility happen in your portfolio? Are you worried about losing percentages or is there a monetary threshold that will make you sell everything at loss?

Maybe you are younger and your investment horizon is over 20 years, in that case you might not care what happens with your money now, but no one really knows how they are going to react when the market crashes.

It’s important to understand that your risk tolerance is volatile, similar to the market. Keep in mind that even if your stocks are not performing well, you won’t lose money until you sell them.

Research, Research, and Research

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Investing is buying shares of a business that you believe in. You’re basically saying to the market that you think these shares should be higher. If you’re buying shares left and right without researching a bit about the businesses, you’re playing a dangerous game!

Keep in mind that research is optional, but even if you’re buying index funds, you should research how the portfolio is built, the past performance and additional metrics outlined below. When buying individual stocks, the research part is crucial.

You need to be checking the last financial reports and trying to get my hands on specific business metrics and ratios. Financial decisions should be backed with data in my opinion.

These are the main metrics you should gather before buying a specific stock:

  • Gross margin: The gross margin is how much money a company is making on the product/services it’s selling. It’s an important measure of a company’s profitability.
  • EBITDA margin: The EBITDA is the earnings of the company before interests, taxes, depreciation and amortization. It’s a great metric to benchmark companies together and understand the operating profit of the organization.
  • Revenue growth (5y): How much growth in revenue the company accumulated in the last 5 years? By knowing this, you can understand if they are getting ahead in their industry.
  • Interest coverage: The interest coverage is a ratio between debt and profitability. It’s used to determine how easily the company can pay interest on its debt.
  • Dividends yield: The dividends yield is the percentage of the dividends the company is going to be giving to his investors on a quarterly or even monthly basis.

There’s a multitude of other metrics you can look at based on the type of investments you’re looking to do.

Asset Allocation

When you’re ready to invest, you should know how your portfolio is going to be shaped. If you’re planning to invest in the short term, like for the down-payment of a house, going with a low-risk option would make more sense.

For context, bonds are a fixed-income instrument which represent a loan made by an investor to a borrower. They are units of corporate debt and can be traded on stock exchanges. A bond is a financial product that is less volatile than stocks so it can be part of your asset allocation. Keep in mind that it’s bringing lower returns than stocks but they are considered “safer” because of it.

A low-risk portfolio would typically have 40% stocks or less and the rest in bonds or fixed-income securities. Maybe it’s for a short-term goal or you simply can’t tolerate high losses and big swings in the market.

A more medium risk portfolio would contain more 60% stocks and 40% in bonds. You can handle market swings but still keep your investments somewhat safe. And a high risk portfolio will be built with stocks only. Long-term plans and nerves of steel are necessary with those investors.

A good rule of thumb to follow for your assets allocation is the rule of 110. This doesn’t take into account your risk tolerance, your timeline and your financial picture, but it’s a good way to get started. You simply take 110 minus your age and it will give your stocks vs bonds percentages.

If I’m 35 for example (110–35), that means that 75% of my portfolio is in stocks and 25% in bonds. The longer you have to invest, the more risk you can handle until retirement.

But why might you ask? Why are younger investors able to absorb more risk? A 20 years old investor has years of earnings ahead of her, so she can afford to take more risk and be subject to volatility than another investor 5 years away from retiring. And since the magic of compounding is linked directly to time spent in the market, they can expect higher returns with lower deposits down the road.

Types of DIY Investor

There’s a few archetypes of DIY investors. Those types of investors are based on investment strategies, stocks, and behavior.

Photo by Austin Distel on Unsplash

Couch Potato

Couch potato investors don’t have the bandwidth to start managing multiple stocks with dynamic analysis. This type of portfolio only requires annual monitoring.

With just one or two holdings, you can build a successful ETFs portfolio with low fees and minimal maintenance. It’s a passive investment style that will get you less returns but has less risks as well.

ETFs(Exchange-Traded Funds) are a combination of multiple stocks, so your investments are diversified AND easier to manage than picking individual stocks, talk about a bargain!

It’s a great style of investment if you want to save on fees and make sure you can get interesting returns. Usually, many portfolios exist with a 50/50 split between bonds and stocks.

Penny Stocker

Penny stocks is a type of stock with shares lower than $5. The penny stocker will build their portfolio exclusively around this type of stock.

Investing in penny stocks is the definition of high risk high rewards. You can lose all of your investment but since those shares are lower in value, it can create substantial gains.

However, quality information about financial records is not available to the public. And there’s a high chance that these companies going under because of bankruptcy or frauds.

Day Trader

The day trader is trying to time the market by buying low and selling high. It’s often associated as a bad practice because of the “get rich quick’’ schemes. Influencers build their network with a community. They explain how you can make money quickly on the stock market and are selling you a course at $2000.

ForEx trading is a great example of why it’s dangerous to try to time the market. Currencies are extremely volatile and analyzing them is complex. The chances that you’re going to become rich out of day trading and forex are insanely low(less than 1%). You might make 15K in a day, but you’ll be minus 32K the next day.

Yes there are some individuals who have made their career around day trading. Let’s keep in mind that it’s not for the average investor, unless you like gambling.

Dividends hungry

Dividends hungry is often associated with the FIRE(Financial Independence, Retire Early) movement because of the recurring dividends. The idea is simple: you buy many shares of a company and you receive quarterly dividends from those stocks.

Some companies on the stock market are choosing to give away dividends to their investors. Lot of investors are building their portfolio with stocks with high dividends yield.

Usually quarterly, it’s important to make sure you’re selecting dividends yield that aren’t too high and are making sense with the company financial reports. With a big enough portfolio, you can create a passive source of income.

Bogleheads

Bogle heads follow the investment philosophy of the Vanguard founder: John “Jack” Bogle. The motto of this philosophy is simple: producing risk-adjusted returns that are better than the returns of average investors. Never trying to time the market, using index funds when possible, keeping low costs and investing with simplicity are all foundations of the bogleheads philosophy.

Like any investing method, Bogleheads should take into account the longevity and risk preferences in the market. If you’re investing for 20 to 30 years, your portfolio needs to be focused more on equity than bonds and you need to rebalance it after a few years. It’s pretty low maintenance but you’re making sure your portfolio is diversified and volatility is “controlled” to a certain extent.

Choose Your Weapon

Which platform should you use for DIY investing? Let’s tackle the different options available for you.

Robo Advisor

Robo advisors work by choosing a model portfolio theory and mainly using low-costs index funds. It’s a good option when you really don’t want to manage your portfolio and even rebalancing your stocks.

There’s multiple robo advisors available out there. Make sure to select the right one by checking the fees and the overall market exposure. Keep in mind that the right robo advisor should have a broad range of low-cost investments, provide automatic rebalancing features, give access to certified financial planners and have second-to-none customer support.

Discount Brokerage platform

Discount brokerage platforms enable you to invest on the stock market with a digital platform. Every major financial institution will provide you a way to use a self-directed brokerage account though.

You need to make sure that the costs of these platforms fit your investor profile. I’m using my bank brokerage account (BNC), but I used Wealthsimple Trade in the past and QuestTrade.

QuestTrade gives you the possibility to invest anywhere,on any market. It’s a complete solution with minimal fees. It requires a minimum deposit amount of $1000 but has $0 fees on ETFs purchases.

Wealthsimple Trade is also a good solution with low fees and great UI. It doesn’t require a minimum deposit and has a mobile version.

Fund family accounts

This type of account is based on family funds such as Vanguard, Blackrock, Fidelity, etc. By working with a family of funds, you get access to a complete expertise and can leverage a pre-built portfolio.

Another benefit of working with fund family accounts is exchange privilege. You can switch from aggressive portfolios to conservative ones through different market conditions. You can work with a single investment company while still being diversified.

How to Start Investing?

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In this playbook, we tackled lots of topics important when you start investing by yourself.

After following these steps, you will be ready to become a DIY investor. However, if you’re still unsure on how to get started, I included a list of resources at the end of this article.

Here all the steps you need to follow to get started as a DIY investor today:

Step 1: Define your investment horizon

Do you want to invest in the stock market for 5 years or 20? Your investment horizon will affect your investing strategy. Time spent in the market will affect expected returns. If you want to invest on an investment horizon of 5 years, you could potentially put everything in stocks, but when it will be time to withdraw, maybe your investments won’t be ready yet because your portfolio doesn’t fit your investment horizon.

A good rule of thumb is to invest until your targeted retirement year. However, you could “play” with a shorter investment horizon but that should not be your priority as a DIY investor. The goal is to leverage compound interest as long as possible to double-down on your returns. If you’re not staying long enough in the market, you won’t trigger the “snowball effect”.

The snowball effect is when one action causes many other similar actions or events. In that case, we’re talking about compound interest. Compound interest is defined as interest on interest so the number of compound periods (e.g. year in the market) make a tremendous difference on the sum of your total investments in the future.

You can learn more about compound interest by trying out this calculator.

Step 2: Build your portfolio

Building your own portfolio seems complicated to the newbie investor, but there are multiple resources out there to make things simpler for you. You could hand pick individual stocks, sure, but it can quickly become a full-time job managing them. So what should be the alternative?

ETFs(Exchange-Traded Funds)! By choosing an all-in-one ETFs or a mix of 2 to 3, you can get good returns without having to manage individual stocks.

You can build your portfolio as you want. A rule of thumb to build your portfolio is the rule of 110. It’s a good way to select the percentage of bonds and stocks you need. You can also do like me and keep 10 to 15% of your portfolio with companies you believe in and do proper research as well. Once you have the percentage right, you can build your model portfolio.

If you’re not interested in building something yourself, know that all major fund family accounts have model portfolios based on your risk tolerance and your investment horizon. Check Vanguard, Blackrock and BMO respective ETFs model portfolios for more insights.

Step 3: Setup your investment stack

Now that you have your investment horizon and your portfolio, it’s time to set everything up! Let’s start with your financial vehicle. If you invest money in your checking account, you will lose money because you’re going to pay taxes on your gains and fees from the bank. There’s two financial vehicles for you to consider: a TFSA or a RRSP.

A TFSA is a tax-free savings account. It’s an investment basket that has been introduced in 2009 by the Canadian government to encourage people to save money. The gains you make from investments and savings in this account are tax-free.

A RRSP is a registered retirement savings plan. Any money you put in the RRSP will be exempt of income taxes the year when you make the deposit, but you will be taxed years later when you withdraw it. It’s a way to get a tax break from the Canadian government and encourage you to save for retirement.

Personally, I’m using a TFSA but you can use a RRSP if you’re not planning to withdraw money from this account. I’m using a TFSA because I’m keeping my emergency fund in that account and I like the possibility of being able to withdraw it when needed, but this is up to you. There’s strategies you can take to choose the best financial vehicles.

Afterward, you need to select the platform you’re going to use to invest. You can work with your financial institution (Lots of Canadian banks are now with a $0 fees policy) or a brokerage app like Questrade or Wealthsimple. Pick something that fits your needs like a mobile version, low-costs, ease of use, and anything else you need.

Open your account, put a starting investment and you’re all set! Your starting investment can be small, but if it’s big, break it down into multiple months to invest. It’s better to keep investing on a regular basis than to put everything in the market at once, but this is part of the big debacle of lump-sum vs dollar-cost averaging so that’s just my personal opinion.

Step 4: Automate your monthly contribution

A big investing myth is that you need lots of money to start investing. That couldn’t be further from the truth. Let’s take four DIY investors that are investing until they retire: Jenny, Gab, Marie and Chris.

Jenny is 25 years old. She will invest for 40 years.

Gab is 35 years old. He will invest for 30 years.

Marie is 45 years old. She will invest for 20 years.

Chris is 55 years old. He will invest for 10 years.

They are all investing until they are 65 years old, the age of retirement in Canada. If you’re younger, you have more time but if you’re older, you have more money to invest.

Jenny is just out of school, so she can invest $500 per month. Gab is investing a respectable $1000 per month. Marie has a great job and is investing $2000 per month. And finally, Chris is at the peak of his career and can invest $4000 monthly.

Let’s assume that they will get a rate of return of 7%. Here is the total value of their investments:

Jenny: $1,242,758

Gab: $1,176,064

Marie: $1,020,812

Chris: $688,075

Time in the market beats the amount invested. The important lesson here is that you should invest often and make sure you stay in the market long enough.

Automate monthly deposits on your investing platform. Take a specific amount and stick to it for X number of years. Your future self will thank you.

Step 5: Rebalance and stay the course

The most complicated part is now done. Everything is set up so you can start your DIY investing journey.

The important part now is to check your investments only once a week or less. Since you’re investing for the long-term, checking your brokerage account daily won’t do you any good.

And once a month, you can rebalance your portfolio to make sure you’re keeping things consistent.

Get started with this Google Sheet template I’m using to manage my investments.

If you learn something or if you think this content might be valuable with someone you know, please share it with them and consider subscribing to my newsletter.

*Special thanks to the Wilfrid Laurier MBA students for proofreading and collaborating on this article.

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Gabriel Bujold

Gabriel Bujold

Product Marketing & Retail Investor. Read my newsletter at https://gabrielbujold.substack.com/