Canadians who have turned to do-it-yourself investing over the past couple of years have enjoyed rising stock markets and high returns. But this upbeat experience isn’t the norm, and they will eventually have their resilience tested in the face of a market downturn.
In a 2024 national survey by the Canadian Securities Administrators, almost half of Canadian investors said they have a self-directed account and 30 per cent of them had been opened in the past two years. Investing with an online brokerage has a lot of benefits: It gives you more control over your accounts, you tend to be more engaged with the process and it can save a ton of money in fees.
The downside of rising markets is that they can give do-it-yourself investors a false sense of confidence in their ability to tolerate volatility. It’s easy to invest when markets are climbing, but can these DIY investors stick it out when markets crater?
The historic evidence is unclear. A common measure of investor resilience is to look at how much money flows in and out of mutual funds during market cycles. Although there are periods when people ditch their funds when the market goes down, The Investment Funds Institute of Canada says that Canadian mutual fund investors tend to stay the course.
That could be because most mutual funds are bought through financial advisers, and a financial adviser can have a calming influence on investors. But DIY investors are on their own.
Here are three questions to see whether you have what it takes to be a DIY investor when times are tough.
Do you watch the stock market every day and get nervous when it’s down? If the answer is yes, you could end up selling your investments in a moment of panic when the market hits the next air pocket or goes into a tailspin. If a 2-per-cent decline makes you uncomfortable, how will you feel when these declines add up to a gut-wrenching 57-per-cent pullback, as the S&P 500 did during the global financial crisis from 2007 to 2009? It takes seconds to hit the sell button, so fortitude and discipline are the name of the game for nervous DIY investors. In my experience, the best DIY investors are the most nonchalant – the ones who don’t know the exact balance in their accounts or how their investments have performed in recent months.
Do you think you can beat the market? Overconfidence is dangerous for investors. Trying to beat the market by choosing individual stocks is a tough game, and even the investing professionals can’t get it right consistently. Some investors have done very well in the past several years by investing in technology stocks such as Apple, Nvidia and Alphabet. Because of this success, there’s a risk they believe they can continue to pick the winners. Let’s be clear: They can’t. An overconfident DIY investor is likely overinvested in a small handful of stocks that have done well, but it exposes them to big losses if the tides turn for those companies. If this is you, you’d be better off working with a financial adviser who can give you an alternative point of view and help you diversify your portfolio.
Do you wonder when you should be buying and selling your stocks or ETFs? If you have questions such as, “The stock market has gone up so much – should I sell now and take my profits?” then you probably don’t have what it takes to keep your hands off your investments. Investors who try to time the market and trade frequently are likely to see their investments underperform over the long run. The best time to buy is when you have the money and the best time to sell is when you need it. Otherwise, holding on is the best strategy.
If you’re relatively new to DIY investing and haven’t lived through a market downturn, now’s the time to prepare. Familiarize yourself with past market declines and develop a strategy for dealing with one when it comes. Because it will.
Anita Bruinsma is a Toronto-based certified financial planner, chartered financial analyst and financial coach. You can find her at Clarity Personal Finance.
