Every investor is faced with a very basic but crucial decision: who will make decisions about how to invest their money?
There are two general options. First, an individual can manage his or her own investments. Alternatively, an advisor can be hired to make recommendations and in some cases do the job of actually managing the money on a day-to-day basis.
So, which route is best?
A spoiler before we go any further: there is no one-size-fits-all answer to this question. It completely depends on the particular individual, their knowledge base, and the time they can dedicate to watching over their money.
Why might someone hire a financial advisor? There are a number of possible reasons. The most obvious is that they don’t feel comfortable managing their own investments. This is nothing to be embarrassed about. Some people know a lot about gardening. Others can do their own renovations. Not everyone in this world is an investment guru.
Even if someone knows their way around the investment landscape, they still may decide to outsource much of the decision-making. You might be a good stock picker but simply not have the time to dedicate to doing it well, especially if you’ve got a full-time job in another field.
At this point, it’s probably useful to underscore that not all advisors do the same job. Here is a condensed list of the kinds of investment advice available, with credit to MoneySmartsBlog:
- Investment Advisors/Stock Brokers: These people offer advice on what stocks and bonds you should buy. They are often paid a commission for every trade you make or a set percentage depending on your total portfolio value.
- Financial Planners: While they do offer general investment advice, planners also look at your overall financial situation such as retirement goals.
- Bank Investment Advisors: These individuals sell products like the bank’s mutual funds.
- Discretionary Money Managers: Whereas a stock broker may simply recommend a stock, a dedicated money manager buys and sells securities on your behalf, pursuant to an agreed upon investment mandate.
As the MoneySmarts blog notes, in some of these cases, the advisor’s interest is not necessarily aligned with yours. For example, a bank’s investment advisor will probably steer you toward their institution’s high-cost mutual funds. As a general rule, if you’re going to take someone’s advice about investments, you want them to be looking after your interests first, not their own.
Of course, there’s nothing that says you have to hire someone to manage your money. Nowadays, there is so much information available online that putting together a well-diversified investment portfolio is not out of reach for most people. Coupled with the fact that online brokerages (sometimes called discount brokers) allow you to place trades yourself, it’s never been easier to manage your finances.
However, just because you can buy individual stocks and bonds doesn’t mean you should. If you’re not well-informed about the markets or don’t have the time to watch your investments on a regular basis, you may get in over your head.
So what’s a happy middle ground? If you want to build your own diversified portfolio, it can easily be done. Index funds, which track a given market such as the Toronto Stock Exchange, offer the same equity exposure as mutual funds but with dramatically lower fees.
If you’re building your own portfolio, you’ll also want a certain portion of your money allocated to fixed income products like bonds. Fixed income is much more conservative than equities and, while it doesn’t offer the same upside potential as equities, you aren’t nearly as likely to lose any money.
GICs can also form part of the fixed income side of your portfolio. With these products, your investment is guaranteed, first by the bank and then by government deposit insurance if the bank goes bust.
If you’re a DIY investor and looking to buy GICs, check out our page where we compare the best GIC rates in Canada from financial institutions across the country.
Flickr: Dave Dugdale