Self-directed investing

In a nutshell, self-directed investing means taking the responsibility and control of the decisions surrounding your investments. By opening a self-directed online trading account, you retain the authority to choose the type of investments you want in your portfolio (e.g. mutual funds, ETFs, individual shares, etc), as opposed to 'managed accounts' where these decisions are made by a broker or other financial professional. Managed accounts typically have a fee associated with them. (The industry average in Canada is about 2½% of your portfolio per year.)

Why self-direct?

So is self-directed investing for you? Knowing why you want to do something usually means you have spent some time looking at the pros and cons. For self-directed investing consider the following.

Pros: More control and the potential for better returns, reduced fees, increased liquidity and greater capital appreciation.

Cons: Investors assume the risk – and the emotional stress. Many also lack the time, knowledge, and discipline.

If you list out your pros and cons then you can work towards getting the answers you need to make an informed decision.

How much money is needed to invest?

Many people believe that to self-direct an account, you need 'lots of money' -- but this is not true. You can self-direct any amount. For example, the new Tax Free Savings Account (TFSA) that allows Canadians over 18 to deposit $5,000 each year beginning in 2009, is eligible to be self-directed.

Other accounts that most Canadians have, including RSPs, RESPs, LIRAs (Locked in Retirement Accounts), can all be self-directed. The amount of money is not the issue. Obviously the bigger your portfolio, the better position you'll be in to buy more shares or more expensive stocks but what's important to remember is not the amount of money that is working but how it is working.

People with a large portfolio (e.g. $250,000 and above) often start by self-directing only a portion of it. There is nothing wrong with using the TFSA as a starting point. And as you become more knowledgeable over time, you can transfer a portion of your RSP account to a self-directed account without forgoing the tax deferral status.