Many investors have a common question: should I pick my own stocks and ETFs or should I put my money in a managed account? (Or should I do both?)
Each approach comes with different considerations to think about –
What should you think about when choosing your own stocks or ETFs?
First and foremost, managing an active stock and/or ETF portfolio can take up a lot of time. You should always research each security you’d like to add to your portfolio and make sure it's a good fit for your goals. For a well-diversified stock portfolio – one with 20+ positions – this can take a lot of work.
In addition to selecting your investments by hand, you’ll also need to monitor your account on an ongoing basis to make sure your portfolio meets the target allocation for your account. You should carve out time to rebalance your holdings at certain time intervals (e.g. every six months).
What are the benefits of choosing your own stocks or ETFs?
Aside from the control you have over your investments, the benefit of the self-directed approach is that the fees are typically very low.
For example, Wealthsimple Trade accounts have no fees or commissions to buy or sell stocks and ETFs. (There are, however, currency conversion fees on USD investments). Many investment platforms in Canada also offer low-fee options for DIY investors.
Using managed accounts
What should you think about when choosing a managed account?
Since managed accounts involve someone else managing your money, they typically have a fee associated with them. When using a managed account, the first thing to check is the management fee. For example, Wealthsimple Invest charges a 0.5% management fee. Many traditional institutions charge around 2%.
What are some of the benefits of a managed account?
Although managed accounts may cost more than investing on your own, there are many benefits to working with an advisory platform.
- Financial planning and advice
Managed accounts often come with advisors who can help you with financial planning and thinking through your entire financial situation. From questions like “Which account should I use?” to “Can you help me plan for retirement?”. Professionals can also help you identify and manage risk in your situation. And having access to an adviser during times of market stress can offer some level of comfort and prevent costly mistakes.
Managed accounts follow a disciplined investment approach, as automated investment decisions lead to better results in general. One of the biggest reasons self-directed investors also use managed accounts is to “tune out the noise”. Markets are volatile and can often pressure investors to make emotional decisions that are often detrimental to the performance of their portfolios. Managed accounts use automated rebalancing, with rebalancing thresholds chosen to maximize the diversification and risk management benefits while keeping transactions costs low.
- Tax and ETF fee optimization
On Invest, we use certain low cost ETFs traded on US exchanges for RRSPs, but use an equivalent Canadian-listed ETF for TFSAs, to minimize non-resident withholding tax charged to Canadians on US assets. We also negotiate on your behalf with ETF providers to reduce your MER.
For investors who may not have the time to build and maintain a sophisticated portfolio, a managed account can provide a great solution for your long-term investments.