Direct-investment-sip-vs-esip
Are you interested in taking control of your portfolio and becoming a "self-directed" investor within the stock market? If so then here is what you need to know. For most people the idea of self-directed investing comes with a myriad of misconceptions and fears but with the right information and knowledge, making your own decisions can produce significant results. It is not unusual, for example, for self-directed investors to outperform managed money and certainly with a good strategy you can produce well above average returns on a consistent basis.
In a nutshell, self-directed investing means taking the responsibility and control of the decisions surrounding your investments. By opening a self-directed online trading account, you retain the authority to choose the type of investments you want in your portfolio (e.g. mutual funds, ETFs, individual shares, etc), as opposed to 'managed accounts' where these decisions are made by a financial planner or another financial professional. Managed accounts typically have a fee associated with them. (The industry average in Canada is about 2½% of your portfolio per year.)
Why should we self-direct?
So is self-directed investing for you? Knowing why you want to do something usually means you have spent some time looking at the pros and cons. For self-directed investing consider the following.
Pros: More control and the potential for better returns, reduced fees, increased liquidity and greater capital appreciation.
Cons: Investors assume the risk - and the emotional stress. Many also lack the time, knowledge, and discipline.
If you list out your pros and cons then you can work towards getting the answers you need to make an informed decision.
How much money do we need to start investing?
Many people believe that to self-direct an account, you need 'lots of money' but this is not true. You can self-direct any amount. For example, the new Tax Free Savings Account (TFSA) that allows Canadians over 18 to deposit $5,000 each year beginning in 2009, is eligible to be self-directed.
People with a large portfolio (e.g. $250,000 and above) often start by self-directing only a portion of it. There is nothing wrong with using the TFSA as a starting point. And as you become more knowledgeable over time, you can transfer a portion of your retirement savings plan account to a self-directed account without forgoing the tax deferral status.
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