As a young investor, should you manage your own stocks, use a robo-advisor or hire a professional? Find out what’s best for you as we weigh the pros and cons.
With so much investing info out there that can be both confusing and conflicting, it is challenging for Gen Zers and Xers to figure out how to get started, especially when you see social media “finfluencers” promoting individual stocks. Young investors not aware of the associated risks with day trading could end up making bad investment choices. Before dumping your money just anywhere, do your research and understand how an investment works along with the inherent risks and rewards. But first things first, let’s look at your options on getting started.
If you’re ready to take the plunge to start investing, here is a breakdown of the three most popular options: self-directed investing, using a robo-advisor and hiring a financial advisor.
| Online brokerage (self-directed) | Robo-advisor | Financial advisor | |
|---|---|---|---|
| Financial knowledge needed | Intermediate to advanced | None required | None required |
| Minimum amount required | ~$5,000 to $25,000 | $0 to $5,000 | • None required by law • Often $100,000 to $1 million |
| Fees | • Trading: $0 to $9.99 • Annual: $0 to $125 • Management expense ratio: ~0.30% to 1%, but can go up to 2% † |
0.4% to 0.8% | • Hourly rate of $250 to $500 • Flat fee from $1,500 to $5,000 for a plan • Fees of 2.0% to 2.5% of assets |
| Use of registered accounts | Yes | Yes | Yes |
| Portfolio | You create | Algorithm-based build | Human creates and manages |
| Your involvement | High | Low | Medium |
| Human interaction and customer service | None | Rare | Always |
† Fees can also depend on the types of investment products purchased; for example, 0% for stocks and up to 2% for mutual funds.
DIY investing is when you take on the responsibility of your assets by “doing it yourself.” DIY investing involves using an online broker. Here are the pros and cons for this investing approach. Looking for model portfolios? Check out the Canadian Couch Potato.
A robo-advisor allows you to have investments without having to manage them, without the higher fees that are usually associated with hiring a professional advisor. Here are the pros and cons.
If you think you would benefit most from a professional person you can talk to or meet in person, consider a qualified financial advisor. They have the education and experience to look at your investments more closely than robo-advisors or online brokers. But here are the pros and cons for advisors.
Where to find one: Use the MoneySense Find A Qualified Advisor tool to help you find a list of credentialed advisors. Consider these questions you should ask when choosing a financial advisor.
Are you the type of person who doesn’t like to see your portfolio’s value drop? Or are you someone who doesn’t bat an eye when you see your portfolio drop by as much as 34%? Remember March 2020?
Well, if you are just starting out and getting your feet wet, it wouldn’t hurt to take a more conservative approach, which means taking on lower-risk investments, such as guaranteed investment certificates (GICs). Or you may decide to be more aggressive since you have decades ahead of you and want to add riskier but higher return assets to your portfolio, such as stocks.
Bonds and GICs tend to be on the safer side, whereas stocks are more volatile, meaning the ups and downs could be concerning to investors. Stock investors generally need to have a long time horizon. Either way, generally a sound strategy is to have a mix of stocks and bonds to balance out your risk. Having many eggs in many baskets will help to provide diversification, so that any impacts will be softened and won’t affect your bottom line.
Personally, I’m a big fan of dividend stocks because it’s a predictable way to earn income. Simply put, dividends are regular payments of profits distributed to shareholders. Let’s say, you owned Canadian bank stocks. Every quarter, you would receive an amount of money per share that you own. You can also enroll in a dividend reinvestment plan (DRIP) which takes those dividends and reinvests them by purchasing additional shares of the same company. Some enthusiasts keep track of their dividend income and take time to grow it. Some have the goal to live off their dividends during retirement.
Traditionally, bonds have been a low-risk investment because they tend to generate lower returns compared to stocks. Although bonds haven’t shown stellar results in the past few years due to interest rate increases (bonds go down when rates go up), it shouldn’t deter investors from adding them to their portfolios. In the long run, bonds help minimize the risk and provide stability when the market goes through a downturn. Plus, the interest rates are now more attractive.
Mutual funds have been very popular among investors for the past several decades. The good thing is a mutual fund can hold many companies in one fund. However, ever since index funds and exchange-traded funds (ETFs) made it onto the scene, it now means that you can buy very similar diversified funds but for a fraction of the cost. That’s why mutual funds have been given a bad rep lately because they are known to have high fees that may not leave much return for the investor. Active mutual fund fees are generally higher than index funds and ETFs because they require a larger team and more research into which stocks to buy and sell than a passive option. If you’re looking for diversification and a simple way to invest in ETFs, a good solution is to consider all-in-one ETFs.
A real estate investment trust (REIT) is a company that owns and may operate income-producing real estate or real estate-related assets. There are a few advantages when it comes to owning a REIT. First of all, it gives you access to invest in the real estate market without having to own physical property. Second, it provides a low barrier to entry since it requires significantly less cash since you are one of many investors owning the real estate. Lastly, this type of investment is a much more hands-off approach compared to being a landlord or real estate agent. REITs can also provide diversification and help to reduce overall risk.
Everyone’s investing journey is unique. Just because something works for a close friend, family member or a “finfluencer,” it doesn’t mean that it’s best for you. Choose the path that makes sense for your financial needs and current situation.
Once you get started, investing can be a key part of how you grow your net worth and fund the lifestyle you want. Continue to learn about stock market investing through blogs, podcasts, YouTube and TikTok videos, but be sure they are from reputable sources. Once you know the investing basics it’s easier than you think!
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
If you use a fintech for banking or investing, Interac e-Transfers might get a bit easier to send and...
You still have time to add to your retirement savings and lower your taxable income before the RRSP deadline....
Which ETFs should you invest in? Which ones best suit your risk tolerance? What about personal ethics? Check out...
Meme stocks continue to capitulate, giving context to Canadian housing, and two questions: Should I worry about the U.S....
When collecting disability, retiring early is an option. But find out how that can impact disability income and retirement...
Created By
Canadian Financial Summit
There’s a reason you’re reacting to an email in your inbox. It’s meant to make you feel like you...
Inflation ticks up in August, the U.S. Fed decides not to raise rates, IPOs make a comeback, what the UAW...
Want to increase your financial literacy or dig deeper into some financial topics so you can make better money...
You haven’t mentioned the couch potato method which is self-managed but also involves an ‘advisor’ and is low fee