Financial Friday #110: Online Stock Investing Made Easy!

Getting into the stock market can be a daunting task as many beginning investors not only struggle with the risk aspect, they also struggle with the logistics of "how to" actually getting their money invested.

A financial advisor would seem like a logical choice and we have done sessions in the past about choosing a good one, but the fees can be high and they may not even be willing to work with clients who don’t have a lot of money to invest. There are also no guarantees that an expert advisor will get you comparatively higher returns than other alternatives, especially if you factor in their fees.

A second option is to go with a full DIY approach using an online brokerage. Plenty of Canadians use this approach and have been successful, but you will need to do some research before you get started, monitor your risk, and make adjustments to your investment portfolio from time to time. It will require more of your time, although there are some new types of Exchange Traded Funds (ETFs) that are making it easier with every passing day.

A third option lies between a fee-based advisor and a full-on DIY approach, and that’s the use of an automated online investing platform known as a robo-advisor. They use an online questionnaire to create and manage a portfolio based on the risk tolerance and investing timeline you indicated in your questionnaire. The robo-advisor continuously rebalances and reallocates the assets held in your portfolio to match your preferences and can be used to easily manage the funds in your TFSA, RRSP or RESP.

Robo-advisors are readily available online from several banks and brokerages and give you "set and forget" type of investing with fees of around 0.75% (or less) annually. This is higher than the 0.25% or so you pay by doing it all on your own, but much lower than the 2% (or more) that you pay with many mutual funds and/or a fee-based advisor. Keep in mind that 2% may not seem high, but the effect of this fee compounded for many years could take tens of thousands from your retirement nest egg.

There are some disadvantages to robo-advisors, but they may not be that much of a consideration for beginning or time-strapped investors. Although you can adjust your risk tolerance, you do not have any say in what assets your robo-advisors buys on your behalf. If you like a particular stock for example, you would have to purchase that outside of your robo account.

Robo-advisor fees are also higher than a straight DIY approach and they are now facing competition from something called "asset-allocation" funds. These new-ish type of funds have many of the advantages of a robo-advisor and offer similar, one stop investment shopping for a lower fee. They often have names like "conservative", "balanced" or "growth" to make it easier to find one that suits your situation and preferences.

Robo-advisors are a good choice for many investors and remain a popular option — whether they are the best option for your situation is up to you. We have a complimentary webinar next week with investing specialist Arian Beyzaei who will go into more detail on robo-advisors. It would be a great one to attend if you are looking to get into the markets (or lower your current investment fees) and want to learn more about your options.

Resources

How interest rate hikes will affect you and what you can do about it
Personal finance guru and Enriched Academy contributor Kelley Kheen offers up some great advice on how higher interest rates are going to affect the average Canadian — and some options for fighting back.

Lifestyle creep keeping you in a paycheque-to-paycheque existence?
We work hard to earn more money and enjoy life more, just make sure your saving and investing rise along with your income.

5 Mistakes I'm making... according to a financial advisor
This short read shows the importance of continuous learning when it comes to your finances and how some expert advice is always a welcome addition.

Are your stock market returns as good as they seem?
We are big fans of long-term stock market investing and the historical returns speak for themselves, just make sure you understand the numbers and what other factors can dig into your stock market earnings.

Does a 7-year (or longer) car loan make economic sense?
The days of low-interest car loans are fast disappearing. Car prices are on the rise and longer term financing has become popular, but do the numbers add up or is a shorter term a better option?