This article will cover the steps of becoming a do it yourself investor. There is no need for an advisor with expensive fees, you can learn how to invest yourself and work towards building your wealth and becoming more rich. Building wealth is more about being disciplined and sticking to your plan than on making a lot of money from your career. Of course a high paying job definitely makes it easier, but it is not a pre-requisite to building wealth by investing.
Setting Money Aside for Investing
The first step towards getting started with investing is building up money on the side that you can use to invest. See my articles on establishing a savings target for more detailed information on how much you will need to set aside for investing in order to reach your savings goal. In terms of approach, I recommend setting aside regular amounts from each paycheck for your investing. Most banks allow you to set this up automatically by yourself using online banking. You simply should select “setup automatic transfers” or the equivalent menu option that your bank uses, choose the to (your investment account) and from (your savings or checking account) accounts and input the amount to be transferred. Select the date of your next paycheck along with the frequency in which you are paid (weekly, biweekly, monthly). With this kind of setup, you will never have a chance to spend this money and it will be reserved for investing purpose. Think of it kind of like a tax deduction from each paycheck. However, this tax deduction belongs to you and will be transformed into wealth for your future!
It has been proven that for most investors, setting up regular contributions instead of trying to time when to invest (too much emotional involvement) leads to better results and stronger average returns. This is called dollar cost averaging. It will have a risk reduction effect by spreading out your contributions evenly over time. If you instead invest with 1 lump sum payment twice a year, you could get unlucky and buy all your investments just as the market is about to dip. You can also get lucky and buy it all just before its about to rise. There is an element of chance to this, and dollar cost averaging reduces this chance and provides a higher likelihood of achieving average investment prices, since dips and rises in the markets are next to impossible to predict.
Choosing an Online Platform for Investing
The next step towards do it yourself investing is to select an online platform in which to use to invest your saved money. As most of my accounts are with RBC, I prefer to use RBC Direct Investing for managing investments myself. The fees for trading are competitive and you have instant access to many mutual funds to get started with through RBC. Other major banks also offer similar services. It is easy to setup and get started through direct investing online. Check your bank’s websites for details. The advantage of using the online platform of your bank allows you to transfer among accounts without fees and see all your holdings in one platform or app. Of course, check out the offerings of different companies as you want to choose an option that minimizes the fees for your situation.
Starting to Invest
Now that your platform is chosen and you’ve set aside a basic amount to invest with, its time to pull the trigger. For investment amounts below $10,000, I recommend starting out with mutual funds. Specifically, low cost mutual funds (small Management Expense Ratio, MER) such as index funds. You will also want to diversify among indices of different markets. Here is an example of diversification using RBC mutual funds:
Fund 1: RBF556 – RBC Canadian Index Fund – 40% of total Holdings
Fund 2: RBF557 – RBC U.S. Index Fund (No hedging) – 35% of total holdings
Fund 3: RBF559 – RBC International Index (Currency Neutral Fund) – 25% of total holdings
This breakdown is slightly weighted in favor of Canadian funds, while still maintaining exposure to foreign markets. This will allow you to hold over 1000 stocks in your portfolio without incurring the fees or headaches of managing them individually. The reason for the slight weighting towards Canadian funds is the beneficial tax treatment. While this is not a strong reason to take the risk of investing only in Canadian funds, it’s the reason I recommend holding more than your home countries “fair share”. I mention this fact from a Canadian perspective, but it can be applied to other countries as well as most have similar laws being more rewarding towards investing within your country.
Growing Your Investments
Now that you’ve initiated the investment plan, its time to stick to it and keep growing your wealth. Getting rich through investing rarely happens quickly. Don’t try to hit a home run, but stick to lots of singles and doubles. A steady pace of investing regularly through dollar cost averaging into a diversified set of index funds will allow you to do just that. Your total assets value will increase through return on investment and your own regular contributions. Here’s what it may look like if you invest 500$ a month for 30 years, at an 8% return:
Now in real life, the curve won’t look this perfectly smooth. There will be bumps and dips as the markets rally and drop. By diversifying in global indices and investing on a regular schedule, you will minimize these variations. As your wealth grows beyond $10,000, I recommend switching to ETFs. ETF’s will charge a per transaction fee, but offer much lower costs than mutual funds (lower MER).
Once a year, re-evaluate your investment holdings and re-balance them all to the desired percentage as listed above. Perhaps home country index outpaced the international holdings. Calculate the ideal amounts that you should have in each category (40, 35, 25 in the example above) and re-balance while using the least amount of moves possible to reduce fees.
Staying disciplined while growing your wealth is the key towards becoming more rich. There is much less risk than any other method out there if you keep emotion out of your investment decisions. Some banks even offer practice accounts for you to use if you are not yet comfortable with investing real money. But really there is nothing to fear if you follow the conservative approach towards do it yourself investing described in this article. The real risk is waiting longer to get started and losing out on lost opportunity. For more tips on investing, check out other articles in our investing section. Be sure to also check out our recommended books section for further reading.