In the previous post, I wrote about the “what” and “why” someone would want to do investing of savings on their own rather than through financial advisors or pre-packaged bank products like Guaranteed Investment Certificates (GICs) or mutual funds. Some might be good for diversification of your portfolio, yes, though if you had time on your hands to let those savings grow, they’re not the best bets. Index funds or Exchange Traded Funds (ETFs) that basically give you a sample of the stock market that always outrun inflation and even 92% of financial advisors, as well as mutual funds that are some “average” of some investing by others, minus fees by the bank or institution offering them, are your best option with time. Then there’s the riskier stock picking, of course. But index funds, ETFs, and stocks, how do you do this on your own?
This is a ridiculously simple question, with a ridiculously simple answer, but only if you know how to ask it the right way. You see, to me, doing something on your own like self-investing, means I go buy the stocks myself, presumably from the stock owners, not through some middle man. However, that’s absolutely not the case. You need to get all these investments through a certified stock broker, which, for someone who does not know the financial lingo like myself, sounds like going through a financial advisor. So I kept getting the answer that made no sense to me in the sense that wherever I was reading up on it, it sounded like they weren’t answering my question! And that frustration had stopped me several times when I tried to teach myself how to do this! It might have been a very costly mistake for all the money I might have lost out on in not doing my own investments much earlier than now, but I’m telling myself that the information I got recently that gave me enough confidence to get ready to jump in so fully at the next market correction, wasn’t there more than a year ago, so I might also have lost a lot. So just accept the present as the best outcome since it is the certain one I know of.
Back to do it yourself investing. That means you make the decisions yourself as to what you want to invest in, selling and buying, but that you still have to use the aforementioned certified stock broker to do it. You don’t actually do it all by yourself, which was what I had thought for the longest time! The stock broker, whether self-directed investing or investing using services offered by others like mutual funds, doesn’t have to be a person, though, like it sounds like it is since it was in the good old days before online trading. It only is a person if it were a financial advisor. Otherwise, it’s a stock trading platform like Wealthsimple or Robinhood, or a bank that offers a trading platform for self-directed investing like many major banks do these days.
So between the banks and the stock trading platforms then, which to go for? Is one better? My answer is like the fundamental for investing, which is diversification, so no, and use both. Each has its own strengths and weaknesses, which may vary for different people, but here are what they are for me:
- Banks – more secure with government backing but with trading fees. Banks, at least the ones in Canada, are probably more secure, with some government support should they get into trouble. Recall how the US government bailed out the banks during some crises? I don’t think the same would apply to trading platforms like Weatlhsimple or Robinhood. The latter not too long ago had to pull stunts like stopping trading on short selling stocks, and might have gotten into cash flow trouble with the GameStop situation, and who knows what might have happened to them financially, but I wouldn’t worry as much if a bank (major Canadian bank at least), were in the same situation, knowing there is government support behind them. That said, your investments aren’t generally protected by the bank. They’re just the tool, so if a stock was actually fraudulent, like Theranos, you would lose out like everybody else. But as a platform, they wouldn’t be relying on trade commissions and fees to survive like platforms like Robinhood and Wealthsimple (which is Canadian and which I feel much better about than Robinhood actually). Our financial regulations are bit more stringent up here. So for the security of the banks, I invest my tax deductible savings through them. That would be the Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TSFA). My investment of choice for those accounts are the Vanguard S&P500 market ETFs (and not sector or other market ETFs they have) mentioned in the previous post, also for security since they’re the safest bet on the stock market, being like your slice of the stock market performance. So for two small fees per year ($7-10 each for over $10k of investments), I put those account contributions in the bank and buy what I can of the Vanguard S&P500 ETFs for the amounts invested. I will do that either after a market correction if one hasn’t happened in a while (2-3 per year), or right away if a correction happened not long before I make the contributions.
- Trading platforms – robo-investing and no fee trading (for some) against more risk being a private entity. As for the trading platforms, there are many. Of those, two major ones I know of in North America offer trading without fees: Robinhood (not available in Canada) and Wealthsimple (Canadian). These are private, and while they have some financial insurance for protection, I’m not as confident in them as with a bank. However, the free trading offered is the draw there, as well as robo-investing, which is algorithms that manages your money invested trying to time and find deals based on the risk tolerance you give it. From what I have read, it doesn’t outperform the stock market, via something like the Vanguard S&P500 market ETF, but that it can outdo a lot of mutual funds and financial advisors. For me, I’m going to do an “experiment” in the first year after I jump into investing, to see how robo-investing will do against my own trading skills and the Vanguard S&P500 ETF to determine what role robo-investing will or won’t have in my investment future. It should do reasonably well with enough time. Nobody would buy into it otherwise! But how well remains to be answered, with at least a year being a “fair sample”, in my opinion, to see how it handles and rebounds from correction, and in comparison to other standards like the Vanguard S&P500 ETF. I will also do some of my own investing, which I have been practicing on real-time simulations via Wall Street Survivor, which I will write more about in the next Investing post. But it’s the robo-investing and no fee trading that are the draws for trading platforms, against the risk of less protection of the banks with trading fees that I do my non-tax deductible investing.
Those things said about the banks and trading platforms, I want to point out a few things.
First, if it turns out I can invest better than the market as mirrored by my Vanguard S&P500 ETFs, I would be better off investing my tax deductible account amounts since I would not have to pay taxes on the greater gains, and would only pay for some at a lower rate when I withdraw as income, at lower income levels, later in my life. Now, all gains outside those accounts are taxed at a high bracket (but not nearly highest bracket) because I earn decent money from my work. I would just need to make sure I keep the equivalent principle of my tax deductible accounts in the banks’ for safe investing and get taxed on that via gains from the Vanguard S&P500 ETFs.
Second is that while the trading fees are relatively small to the amounts involved in each trade for what I have been doing in my simulations while waiting for the market correction, like 0.1% or 0.2% per total $ amount involved in the trade, it would still add up! I’ve only been at it for three weeks so far, but I’ve been averaging about $200 per week trading on a simulated $100,000 portfolio! That’s $600 for three weeks (2-3 sells and 2-3 buys each weekday on average skewed by initial buy of 12-20 stocks in two scenarios). This is a noticeable amount out of the roughly $8100 gain I’ve made so far in one scenario, and less of one in the $19700 gain in another scenario as I try out different strategies. However, if you gave me $200 of free money for each week right now, I’d be over the moon! So I’m not going to ignore the small slice of gains the fees as if they don’t mean much. Hell no! $10000 a year in trading fees is ridiculous! I’ll take my chances on the trading platforms without fees and a little less security than the banks, thank you! It’s not like these platforms are a big risk given their assets and constantly being monitored by financial hounds!
Next time… a bit on my strategy for picking stocks.