How to create a DIY investing strategy

Regulators worry that without professional advice, investors with limited knowledge and information may lose money. You don’t need a degree in finance to be a successful investor, but it helps to have a carefully considered strategy. The key is common sense: Know your investing goals, be realistic about your risk tolerance, consider your time horizon and base your decisions on thorough research.

Let’s take a closer look at these four factors.

1. Set your investment goals

What are you saving up for—a short-term goal like home renovations or a wedding? Or a long-term goal like retirement or funding your child’s education? Your financial goals can help determine what investments you choose and which account types to use.

The safest options for short-term goals are interest-bearing investments, like high-interest savings accounts (HISAs) or guaranteed investment certificates (GICs). For longer-term goals, however, you may want to consider investments that can generate higher returns, such as stocks. With interest rates at historic lows and prices soaring, inflation may well outpace the interest you earn from HISAs and GICs, eating into your purchasing power over time.

Accepting higher risk in exchange for a higher potential return is a core investing concept known as the risk/return trade-off. But the key word here is “potential.” Any stock can be a money-loser. Because markets are inherently volatile, many experts recommend that investors plan to hold their stock purchases for at least five years, unless you have a compelling reason to sell, such as needing funds to buy a house or to compensate for lost income after a lay-off.

Research shows that market timing is a losing strategy—major market drops are often followed by big upswings, including the market’s best days, and panic sellers frequently miss out. Buying and holding the S&P 500 has been a winning strategy 94% of the time since 1930, according to Bank of America, which has called long-term investing “a recipe for loss avoidance.”

2. Assess your risk tolerance

Stock markets go up and down every single day, sometimes significantly, and some investors can find that volatility stressful. Emotions can derail long-term investment strategies, so it’s important to understand your risk tolerance and invest accordingly—for one thing, you’ll sleep a lot better.

When markets decline sharply—such as the coronavirus crash in March 2020, which saw the S&P 500 decline more than 30% in just over a month—investors who have misjudged their risk tolerance may panic and sell their holdings at market lows. Conversely, when stocks are soaring, losses seem less likely. Afraid of missing out, investors might overpay for stocks. (A company’s price-to-earnings ratio can help you determine if its stock is over- or undervalued.)

Keeping your risk tolerance in mind can help you steer clear of riskier strategies, like buying “on margin” (with borrowed money) or trading options, where you can lose more than your initial investment. Designed to amplify potential returns, these strategies also magnify risk.

3. Consider your investing time horizon

When planning your investment strategy, consider your age and life circumstances. Younger investors are often comfortable taking on more risk because they have plenty of time to recover from market downturns without losses affecting their assets, like real estate or retirement savings. As people get closer to retiring, they often shift their portfolio towards more conservative investments—for example, fewer stocks and more bonds. If you need help with determining your asset allocation, consider consulting a financial planner.

No matter your stage of life, if you decide to pursue higher-risk investments—such as cryptocurrencies or shares in startup companies—it’s smart to limit your exposure to an amount you can afford to lose.

4. Find credible investment research

Many people are getting investing ideas from Facebook, Instagram, TikTok and other social media platforms. Often, however, online investing information is superficial, incorrect, misleading or biased—meaning that investors still need to do their research.

Where should you look for investing guidance? In the past, only the most affluent Canadians had access to high-quality investment research. Now, however, affordable help is at hand, regardless of the size of your portfolio.

One example is Motley Fool Stock Advisor Canada. Motley Fool is a private financial and investing advice company, and Stock Advisor Canada is one of its premium members-only services. More than 70,000 members visit the site for investment ideas, independent analysis and educational materials.

Stock Advisor Canada does the research for you, so you can consider the pros and cons of each stock. “Starter Stocks” are Motley Fool’s foundational picks, which may be suitable for the core of your portfolio. “Best Buys Now” are timely trading opportunities chosen from a universe of more than 150 stocks.

New members can join for an introductory price of $99 (after the first year, the fee is $299). Each month, you’ll receive two fresh investment ideas, one Canadian and one American. You’ll get access to an extensive library of research—including reports, videos and podcasts—and a members-only forum where investors discuss ideas, ask questions and gather market intelligence. It’s like social media for investors, but without the scammers.

Performance-wise, Motley Fool’s recommendations have a reputable track record—over the past eight years, they’ve delivered double the performance of the TSX/S&P Composite Index, with their average stock pick up more than 100% (returns as of Jan. 13, 2022).

Whether you’ve already started investing in stocks or are about to open an account, joining Stock Advisor Canada can help you find the right picks for your portfolio.

More on investing:

• What we learned about investing during a pandemic
• Where to hold investments for tax savings
• A guide to the best robo-advisors in Canada
• Market-linked GICs: The pros and cons for investors

About Stephanie Griffiths

Consulting editor Stephanie Griffiths was an award-winning investor for almost 20 years before returning to her roots in journalism, completing a Master’s degree in 2016.

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