Do-it-yourself style investing
Financial Post - Saturday August 17, 2002
By Jonathan Chevreau
Shakespeare's Primer is still available for free
Do-it-yourself investing is the polar opposite of wrap programs, or segregated investment management.
Between these extremes is the most common terrain, occupied by investors who use brokers to buy individual stocks and bonds, or rely on financial planners to buy mutual funds.
Most DIY investors migrated from this middle camp, gradually becoming disgusted at the errors that their advisors failed to veto.
The prototypical DIY investor is Lethbridge, Alberta-based Keith Betty, a retired chemist whose investing approach is outlined on the Net as Shakespeare's Primer (www.telusplanet.net/public/kbetty/retireinvest.htm).
As befits cost-conscious DIYers, the primer is free.
During his early, asset-accumulation years, Betty used a traditional broker, moving gradually from Canada Savings Bonds to mutual funds to individual securities. He says his "Bay Street education" cost him more than his 10 years of university tuition.
Many investors know Betty through his Internet name, Shakespeare, but "the bard" has started to gain growing media exposure.
Betty believes a single person like himself doesn't need a huge amount of money to retire. He did so three years ago at age 50, living modestly, but comfortably 135 miles from Calgary, with a dog and a cat. He is an avid reader [financial and fiction, though not much Shakespeare], a news junkie and Internet enthusiast.
He treats investing as a part-time job which consumes 15 hours a week.
Most full-time employees with little interest in financial matters probably should not be DIY investors, Betty says.
The primer begins with a disclaimer warning he has no formal financial qualifications. He is "not associated with any bank, mutual fund, brokerage, or other seller of securities."
For those seeking objective, independent advice, this can be viewed as a plus. Betty's core beliefs are often debated with other DIY enthusiasts on the Internet.
The primer provides a generous collection of links to useful sites.
Betty lives on a modest pension and the proceeds of his self-managed investment portfolio. His core investing values are risk management, tax efficiency, low transaction costs, dividend income and -- most important -- asset allocation. These are intertwined: asset allocation is the main way risk is controlled. Part of that involves disciplined monitoring and rebalancing of the mix between chiefly stocks and bonds.
Betty is risk-averse, an attribute shared with many other investors. He aims not to get rich quick but "to keep from getting poor quick." That doesn't mean he avoids stocks. He believes both in global equity investing and Canadian high-yielding dividend-paying stocks, preferably those with a solid record of rising dividends.
Market volatility is less important during the asset-building years, provided one has employment or other regular income. But once retired, risk is of high importance.
Betty believes bonds should comprise 25% to 75% of a portfolio, depending on age and risk tolerance. But he is a contrarian, always seeking out the consensus and then acting contrary to the herd. Thus, as others talk up bonds during the bear market, Betty is selling his bonds to buy more stocks. When dot-cons were popular in 2000, Betty sold out of tech and invested in value stocks. Last fall, when common wisdom said inflation was dead, he loaded up on inflation-indexed real return bonds.
Betty expects a balanced portfolio will return 6% or 7% a year in the near future, which makes his "costs matter" mantra all the more important. For Betty, that means the high management expense ratios of most mutual funds eliminate them from contention. He looks instead to exchange-traded funds, or individual stocks, bonds or trusts.
Betty is highly tax-sensitive, noting a tax drag of 1% to 2% a year can hurt poorly designed portfolios. His non-registered portfolio is about equal to his registered portfolio, and the primer shows what investments should be inside and outside an RRSP.
Thus, he suggests, non-registered portfolios hold Canadian dividend-paying stocks [for the dividend tax credit]; and stocks or funds generating capital gains [50% inclusion rate for capital gains tax, and ability to offset gains with losses].
RRSPs should hold fixed income that would otherwise be highly taxed -- real return bonds, nominal [coupon] and stripped bonds; foreign bonds; RRSP clone funds and U.S. dividend-paying stocks.
Some securities can be held in either vehicle. Thus, Canadian common stocks or ETFs are best held outside an RRSP but are acceptable inside if most of your investments are registered.
Preferred shares produce dividend income and should be held outside RRSPs. Canadian Originated Preferred Securities produce interest income and should be held inside RRSPs.
Real Estate Investment Trusts, royalty trusts, and income trusts may be appropriate for income-seeking investors. REITs or income trusts often include a "return of capital" component which is tax-deferred outside an RRSP. If the trust produces mostly interest income, it should be held inside an RRSP.
For working individuals still building a portfolio, these securities should be held in RRSPs to minimize tax drag. They can be switched to a non-registered account after retirement to provide tax-advantaged income.
Betty considers REITs and income and royalty trusts as part of his equity allocation. He holds REITs, not income trusts.
He suggests holding bonds in five-year ladders but avoids longer-term bonds in favor of real-return bonds.
Risk management is even more critical than keeping down costs, Betty concludes.
"High costs will erode a portfolio slowly. Poor risk management can kill it quickly. Manage the risk and the return will take care of itself."