A recent survey commissioned by the Canadian Securities Administrators (CSA) found 45 per cent of Canadian investors have self-directed accounts and says nearly one-third of them decided to go it alone in the past two years.
It also finds the number of Canadian investors who use professional advisors has dropped by 8 per cent to 61 per cent since the outbreak of the 2020 Covid Pandemic.
In 2020 alone, the number of self-directed accounts tripled from the previous year to 2.3 million, according to financial services research firm Investor Economics.
If you are a do-it-yourselfer, or thinking about it, here are five ways to manage risk.
1. Minimize risk and maximize opportunity by diversifying
Diversification is essential for long-term investors to spread risk and keep their portfolios poised for a world of opportunity.
Mutual funds are the only option for most Canadians to create a properly diversified portfolio, but annual fees often top two per cent of the amount invested.
Investing directly in stocks and bonds, and market-weighted exchange traded funds (ETF) can keep those fees invested and compounding over time. Be sure to include the best investments in each asset class (stocks and bonds), major sectors, and geographic regions.
2. Avoid online trolls
The CSA survey also found Canadian investors who use social media for research increased 18 per cent since 2020 to 53 per cent.
In many cases investment ideas are merely sales pitches from savvy promotors. Pushing investments on the unsuspecting public is a multi-billion dollar industry that mostly plays on a natural fear of missing out (FOMO).
If you think a stock is poised for gains, call up a chart and check out its performance over several periods of time. Retail investors are notorious for buying into the hype at the top after a short pop when bigger, short-term, investors are looking to cash out.
Also, check out basic valuation metrics from credible sources including the price-to-earnings ratio (PE). In any case the true, or intrinsic, value of a stock is based on the company’s ability to grow profits. The PE ratio compares the current market price of a stock to the company’s earnings (profits) per share.
Many penny stocks don’t even turn a consistent profit to register a PE ratio, and in some cases, the price is way out of whack with earnings. At that point it’s more like a pyramid scheme where its value is based solely on a widespread belief it has value.
3. Back to school
Many online trading platforms offer tutorials on how to interpret valuation metrics along with other investing basics. Some even offer analyst ratings and technical analysis tools to spot market trends.
DIY investors who want to take it up a notch can enroll in a Canadian Securities Course similar to those taken by professional money managers.
4. Lock in gains with stop losses
Another free service most online trading platforms offer is the ability to set stop losses. A trailing stop loss allows you to pre-set an automatic sell price that remains just below the current price to lock in gains and limit losses.
5. Always have an exit strategy
Never enter a position without staking out the exits. In many ways, knowing when to sell is harder than knowing when to buy. Value investors sell when a stock price exceeds earnings. Some professional money managers automatically review a holding if it doubles in value within a year to determine if the reason for buying it still holds up.
If your investment exceeds expectations, consider selling all or some and putting the profits into other investments.
If it tanks, consider selling at a loss and chalking it up as a learning experience.
