The pandemic-fuelled stock-trading frenzy saw Canadians open more than two million do-it-yourself investment accounts in 2020, a development that has regulators worried.
The risk is that inexperienced investors will “bet the farm” based on information they don’t fully understand and lose, the Investment Industry Regulatory Organization of Canada (IIROC) warned in a recent press release.
“We urge investors to be careful about where they are getting their investing information, as many sources are unregulated and may contain inaccurate information,” Lucy Becker, IIROC’s vice president of Public Affairs and Member Education Services, said in a statement.
Canadians opened more than 2.3 million new DIY investing accounts between January and December 2020, according to data provided by financial services research firm Investor Economics and shared by IIROC (the numbers reported do not indicate how many accounts were closed in the same period). That’s nearly triple the number of new self-directed accounts opened in 2019, the figures show.
Meanwhile, IIROC says the volume of inquiries and complaints it receives from DIY investors nearly quadrupled between March 2020 and January 2021 compared to the same period in 2019. The surge has prompted the organization to recirculate its Investor Bulletin to help Canadians evaluate whether DIY investing is for them.
In both the U.S. and Canada, the COVID-19 health emergency has seen scores of small investors flock to self-directed accounts offered online and through mobile apps. It’s a development market-watchers have attributed to pandemic boredom — with adults and teens cooped up at home turning to stock trading for a thrill. Consider the dizzying stock-market rally — with the S&P 500, the U.S. benchmark index, up around 75 per cent since its low on March 23, 2020 — and the rise in low- or no-commission trading, which makes buying and selling stocks affordable even for everyday investors.
But commentators have also blamed the trend for injecting volatility into the market, with DIY investors using social media to share tips and pile into stocks that have seen wild price swings over the past few weeks. That’s what happened, for example, with shares of struggling video game retailer GameStop after traders in an anonymous chat room on the website Reddit, started targeting the stock.
IIROC told Global News it is worried about the impact the increased volatility may be having on some investors. Over the past few weeks, it has experienced a sharp increase in calls from investors complaining about delays in accessing their accounts, especially from clients who prefer to reach their dealers over the phone, the organization said via email. Since 2017, more than half of Canadians calling IIROC about DIY investing have been over the age of 55, the organization said.
“Now more than ever, investors must be informed and must ask themselves important questions before embarking on the path of DIY investing – because DIY investors must be comfortable with not receiving any help with their investments,” Becker said in an email statement.
Still, DIY investing doesn’t necessarily mean trying to make a profit by frequently buying and selling individual stocks — an approach many investment experts equate to gambling. Canadians can also use self-directed investing to pursue simple, mirror-the-market investment strategies that come with both low fees and low effort, says investor advocate Larry Bates, author of Beat the Bank: The Canadian Guide to Simply Successful Investing.
With investing in general — whether it’s self-directed or not, “there’s the extreme of speculating on options and on the other end, long-term investing, maybe with a diversified portfolio of index funds or even GICs (Guaranteed Investment Certificates),” says Benjamin Felix, portfolio manager at PWL Capital.
And yet, investing without help from an advisor isn’t for everyone. If you’re contemplating the DIY route, here are some of the questions the IIROC says it’s important to consider:
What's your level of investment knowledge?
You don’t have to be a Wall Street whiz to embrace DIY investing, says Bates.
“You don’t need to know about options and shorting and all that stuff — that’s for professionals,” he says.
But you do have to know the basics, Bates adds. You should know what stocks, bonds and dividends are, and how financial markets behave, he says.
In the long run, a stock’s performance is tied to a company’s earnings and expected earnings.
“You need to know the difference between using the stock market as a speculator or gambler versus using the stock market to become a long-term investor in great companies,” Bates says.
Buying and holding a group of stocks that behave like a broad market index, for example, by purchasing units of an index mutual fund or an index exchange-traded fund (ETF), is a simple strategy embraced by many DIY investors with a long-term horizon.
The tough part for many, though, is sticking to that index-based strategy, Felix says.
“A lot of people are getting compelled to invest because they’re hearing about stuff like GameStop and they’re seeing Bitcoin double in price in a couple of months,” he says.
And it can be difficult to stay committed to index investing when the investing platform you’re using is also advertising the possibility to day-trade or invest in cryptocurrencies, Felix adds.
How much time do you have to invest in investing?
Researching investments and tracking their performance can be time-consuming. But DIY investing doesn’t have to be labour intensive, Bates says.
These days, self-directed investors can set their investments on autopilot with all-in-one ETFs — also known as asset allocation ETFs, Bates says. These are funds that may include both stocks and bonds and offer global diversification across Canadian, U.S. and international markets, low fees and automatic rebalancing, meaning you don’t have to worry about re-aligning your portfolio to maintain your desired value split among different types of assets despite price fluctuations.
What's your appetite for risk – how do you personally deal with the gains and losses you may experience?
While stocks come with the potential for higher gains, they’re also more volatile. Lower-risk investments like bonds, on the other hand, are more stable but also offer lower returns. What portion of your investments should you risk in the stock market?
That’s the most important question for any investor, whether you’re DIY-ing it or working with an investment advisor, Bates says.
The right balance between risk and reward usually depends on your own ability to emotionally tolerate market fluctuations, your financial goals and how long you can keep your money in the financial markets without the need to draw from your investments.
If you’re a DIY investor, you can use online questionnaires provided by investment firms such as Vanguard to help you assess your risk tolerance.
At the same time, “blindly following one of those tools might not give you an appropriate answer, they may be too conservative or too aggressive,” Felix says.
Choosing the right asset allocation without having a conversation with an investment advisor can be “challenging,” Felix says.
How much money can you lose? If you were to lose money, how much can you afford to lose before your standard of living is affected?
Over the long term, the stock market has performed well, but day-to-day it can go up or down. If you invest with money you’ll need soon, you may be forced to sell your holdings at a loss.
One way to manage the risk that comes from the volatility of the stock market is to invest with money you know you won’t have to touch for several years.
But riding out the swings of the market is one of the hardest skills for investors to master, Felix says. Having an investment advisor can help you remain disciplined when stocks are crashing — or skyrocketing.
Felix says he’s dealt both with clients who wanted to cash out their investments after stock prices tanked and others who wanted to borrow to invest more.
“I talked people off the ledge of selling and I talked people off the ledge of getting more aggressive, because the market just changed like that,” he says. “That’s not a reason to change your allocation.”