To trade or not to trade? That is the question that can make a big difference for the do-it-yourself investor.
Many DIY investors are tempted to overtrade, seduced by transaction fees as low as $10 a trade and bull markets. But George Christison, a British Columbia-based investment planner at IFM Planning Services, suggests they might be short-changing themselves because they're operating without enough information or enough portfolio diversity.
"For the DIY investor it's difficult because they don't have a lot of independent sources," says Mr. Christison, who has founded a website called InvestingForMe.com. "The bulk of information in the DIY world is about stocks."
This tempts some investors, particularly during an extended bull market. "It leads people to believe that their system or their intelligence or their skill set is what's making them the money," he explains.
"People begin to believe they have a system that can outperform the market. But if there were a system that outperformed the market, there wouldn't be a market because everybody would be doing it. A market needs buyers and sellers and there wouldn't be both."
It's important to develop a plan that includes less glamorous equities such as bonds, preferred shares and guaranteed investment certificates (GICs), so you can lock in profit safely, Mr. Christison says. Trading stocks a lot without such a plan is inefficient and often ineffective – people will trade back and forth within the same sector, mistakenly thinking it's going to make a difference.
There is no industry standard that says how much trading is too much, but if your portfolio isn't doing well, "over the cycle of the market you're going to severely underperform," Mr. Christison says.
Some overtraders get their timing all wrong. "They don't have the emotional capacity to sell the losers. They double down. Or they play what I call 'calculator greed.'" People will hang onto 1,000 shares of a stock that has risen because they think it will keep going, without really having information, Mr. Christison says.
It can be challenging for DIY investors to understand the securities they want to keep. "Even some buy-and-hold investors will hold onto a mutual fund for 20 years without looking at how many trades the fund managers are making within the fund," he says.
For example, the popular TD Canadian Equity Investment Fund has $2.6-billion of Canadians' savings invested in it. The fund's objective is long-term capital appreciation through investment in high-quality Canadian equity securities, which would seem to suggest a hold 'em strategy.
Mr. Christison says the fund's managers have traded every investment in the fund more than 14 times since 2008 and did worse in the 2008-09 downturn than at least one comparable competing fund.
"To their credit, they have changed management" to a style more consistent with the fund's stated long-term objectives, he notes. But both the earlier trading activity and the change would be hard for a DIY investor to know about without doing a lot of self-research.
There is nothing wrong with buying and selling securities if you have a plan and understand why you're making moves, Mr. Christison says. A good first step is to think beyond stocks.
In addition to his own InvestingForMe website, he recommends that DIY investors look at other sites, such as Adviceforinvestors.com, a subscription service called Bondview and courses and materials offered by the Canadian Securities Institute. Much of the institute's material dealing with bonds tends to be geared toward more sophisticated investors or professionals, he says, but DIY investors should seek to become informed, too.
"The only way a DIY investor is going to learn how to avoid overtrading is, [he or she] is going to have to invest the time," Mr. Christison says. Start by developing your own investment policy statement – the risk you're willing to take, your short- and longer-term objectives and the types of moves that fall within your own policy.
"You're no different than a coach," he says. "If you're coaching a hockey team, you won't get 11 Wayne Gretzkys for your bench. They wouldn't all be able to get the puck. You'll need defence and a goalie, too. In portfolio management, your defence players are your bonds, preferred shares and GICs."
A good coach will develop a playbook and try it out with practice, he adds. "When plays aren't working out, they don't start creating plays on the fly. They plan them before."
One technique he suggests is developing a "fantasy" portfolio – drawing up a list of investments you would buy, but keeping and tracking it on paper for six months, or perhaps even a year.
"You're much better to do that and watch them before you commit your money."