As someone who tries to help people optimize their personal finance decisions, I have been frustrated by the DIY investing hurdle for several years now.
I know that I’m not alone in this frustration, and it appears to be quite a common affliction amongst many in the personal finance blogging community.
See, I know that basic index investing using 2-4 vanilla ETFs is relatively easy (with maaaaaybe 3-10 hours of upfront reading) and super cheap. And I know that I can show others that DIY index investing using 2-4 vanilla ETFs is relatively easy and super cheap…
I even know that most of the time, at the end of
my sermon our chat, folks will agree that using ETFs, embracing passive investing, and simply rebalancing their portfolios 1-4 times per year is the way to go.
What I don’t know is how to get people to actually execute DIY index investing!
I’m not sure exactly where I lose people...But somewhere along the road from learning about the statistical excellence and relative ease of building a “couch potato portfolio”—and actually opening up a discount brokerage in order to purchase their first few units of an ETF—way too many of the people I’m trying to help get lost.
They wander off course, start looking at maps of a million other investment paths, half-complete the 1-2 forms that are needed, and eventually, several years later, they realize that they:
- Never started investing, or
- Are still investing in high-fee mutual funds
Clearly these are very sub-optimal outcomes
Do As I Say – Not As I Do
Over the past year, my frustration has eased substantially.
This is due almost solely to changing my go-to recommendation for novice investors that are looking for a basic solution, from discount brokerages to robo advisors.
See, many of the Canadians that I encounter are looking for investment options that embrace the philosophy of index investing, but are even easier to implement than the discount brokerage path.
They want hands-off investing for their hands-on life.
Since writing and updating my definitive overview of Canada’s robo advisors, I have been amazed at how many people have connected with this fintech (financial-technology) solution to everyday investing problems.
This puts me in the somewhat awkward position of recommending a different path than the one I myself travel down since I continue to cut fees to the absolute bone using my discount brokerage account and 3-ETF portfolio (average MER of about .22%).
So I thought that it might be useful to detail exactly what steps you could use to determine if a robo advisor is a better choice for you than the DIY option that most Canadian bloggers recommend.
The temptation when reading about these choices is to default to the lowest possible price (DIY) – but I would caution you against writing off the simple robo option too quickly.
The value of the combination of automation and advice that robo advisors offer, in addition to their simplicity to set up, is very easy to underestimate.
It’s important to remember that while the difference between the MER and/or fees associated with robo advisors and the costs attached to DIY index investing are substantial (likely .5% per year of your portfolio or so), the difference between not getting start at all (paralysis by analysis) and using a robo advisor is massive.
Determining the Best Personal Fit
Without further ado, here are four questions to honestly ask yourself if you want to give yourself the best chance of investing success:
1) Do you want to take 3-10 hours of your time to read about index investing?
Index investing with vanilla ETFs within a discount brokerage account isn’t difficult, but it is intimidating if you don’t spend a few hours upfront to become familiar with the terms used, and the overall psychology behind how investing works.
Related: Intro to Self-Directed Investing
2) Are you comfortable with applying grade nine math to your investment portfolio?
Please don’t take offense to this question. I’m cool with grade nine math, but grade nine foreign languages is a real headache for me!
Re-balancing a basic couch potato portfolio is just about using percentages and fractions to keep your investment portfolio looking the way you initially determined it should look. (Not being swayed by the latest investing fad or watercooler tip.)
3) Does the ease-of-use/ease-of-signing up for something affect your ability to get started and stick with it?
Think about working out. Are you the type of person that is much more likely to work out if you can do it from home or have a gym relatively close by? Or are you more the type of person that becomes so focused on their goals that a 40-minute drive is no obstacle?
4) Do you enjoy having a knowledgeable person to bounce financial ideas off of?
Perhaps you have someone in your life that can fill this role, but many Canadians just aren’t ready to completely cut the cord with a financial advisor. While each robo advisor does “advice” a bit differently, they all offer someone to talk to about basic personal finance questions.
Don’t Get Sidetracked
After witnessing so many potential investors get sidetracked on their way to opening up a discount brokerage account and building their own couch potato portfolio, I’ve come to realize just how valuable a truly hands-off investing experience is to Canadians. In hindsight, considering how popular crazy high-fee mutual funds are, this should have been more apparent to me.
Robo advisors efficiently combine this automatic (no monthly decisions!) investing solution, with the relatively low-fee and markedly better return world of index investing.
The question inevitably becomes: Is .5% of your portfolio annually (roughly) worth the ease of use, low barrier to entry, and advice that comes with a robo advisor?
While the answer for me (an acknowledged personal finance geek) is still no, the answer for many more Canadians than I would have thought not-so-long ago is a resounding “YES”!
This article is a guest post by Kyle Prevost, whom you can find writing at YoungAndThrifty.ca...when he isn’t at the front of his classroom (or trying to relive his glory days on a basketball court).