Your Complete Guide to Index Investing with Dan Bortolotti

The Biggest DIY Investing Challenges

2013-10-07T13:05:43+00:00October 7th, 2013|Categories: Behavioral Finance|35 Comments

At the recent Canadian Personal Finance Conference in Toronto, I participated in a panel discussion that touched on a wide range of investing topics. My co-panelists were Michael James and financial planner Jason Heath, and we were moderated by the esteemed Big Cajun Man. The first question we were asked to address is whether it makes sense to use an advisor or to invest on your own.

That was a tough question to tackle in a room full of committed do-it-yourselfers. It’s also one I’ve struggled to answer honestly in the last couple of years. I’ve been an advocate of DIY investing for some time, and I still believe many investors with uncomplicated situations are capable of managing a simple index fund portfolio on their own. Indeed, I think anyone with less than $100,000 or so should seriously consider doing so, because it’s awfully difficult to find an unbiased, fee-based advisor unless your portfolio is larger. And unfortunately, it’s all too easy to find a commission-based mutual fund salesperson who will turn your wealth into his own.

But over the years, as I’ve corresponded with readers—and more recently started working with clients—I’ve learned that DIY investing is much harder than it sounds. Experience has taught me do-it-yourself investors face a number of significant challenges—some technical, some behavioral. And unless they can overcome these obstacles, most would be better off working with a professional who provides unbiased advice for a reasonable fee. Here are the difficulties I see most often:

Analysis paralysis. I’ve spoken with investors who have accepted the theory of index investing for months, even years, but have never taken action. Ironically, those who have done the most research are most likely to be the deer in the headlights. They obsess over small details, or they can’t resist timing their entry point: they want to wait for the US market to cool off, or for interest rates to rise, or for some economic forecast to prove true. All the while they ignore the enormous opportunity cost of doing nothing.

And the longer they wait, the harder it is to pull the trigger. I have been surprised to learn just how many people are sitting on six-figure piles of uninvested cash. They know what they have to do, but they’re waiting for the right time to act. They don’t realize there is never a time when investing a lump sum feels good.

Focusing on products. Successful investing is about saving regularly, keeping costs low, diversifying broadly, and sticking to a plan. Yet it’s remarkable how many people believe the key to success is choosing the right products. That’s like thinking the most important ingredient in your fitness plan is the right pair of shorts.

For index investors, selecting appropriate ETFs is important, but whether it’s this one from Vanguard or that one from iShares is a trivial decision. Product selection is probably 10% of the process in terms of importance, yet it can occupy the majority of investors’ attention.

In our DIY service, we generally use the same ETFs for all our clients, and they’re the same ones recommended on this site. Even then, we could easily find substitutes for all of them and wouldn’t change anything meaningful. We earn our fee by helping people implement a disciplined savings strategy, helping them determine the appropriate amount of risk, ensuring their portfolios are tax-efficient and educating them about the importance of staying the course. Product selection barely enters into it, since it has little value.

Resisting simple solutions. Total-market ETFs have made it possible to hold thousands of stocks in dozens of countries using no more than two or three funds, and with annual fees under 0.20%. Toss in a single bond fund and you’ve got a richly diversified portfolio that’s super-cheap, easy to maintain, and likely to outperform at least 80% of professional money managers. But hardly anyone is content with that. Many DIY investors feel compelled to add unnecessary complexity and end up sabotaging themselves.

Advisors need to share part of the blame here. Far too many think they can add value by tossing sector funds, exotic asset classes, or individual securities into the mix, none of which is likely to boost performance. But they are often under pressure from clients who ask questions like, “What do I need you for if my portfolio is only four or five funds?” For many small registered accounts, a single balanced fund would probably be ideal, but you might be surprised at how many investors push back against simple solutions.

I’ll look at some other DIY challenges later in the week.


  1. Phil October 7, 2013 at 9:29 am

    Hi Dan,

    One of my investment challenges is that the larger my porfolio becomes (it’s in the low 7 figures), I find a nagging thought that I should be “doing more”. I find that being a regular reader of your site, bogleheads and andrew hallam’s blog keeps me from deviating from my simple couch potato plan and doing something stupid. Have you come across this “investment challenge”?

  2. Mike October 7, 2013 at 10:09 am

    Thanks for another great article Dan.

    For me the hardest part about being a DIY investor is figuring out the most tax efficient way to organize my portfolio. I have significant investments in non-registered accounts, as my registered accounts are maxed out. This site and a few others have provided some good general tips (everything in its place); but it remains a complex exercise.

    Although I recognize everyone’s situation will be a bit different, is there such thing as a ranked list of investment categories from most tax efficient to least tax efficient?

  3. David October 7, 2013 at 10:18 am

    Sound advice as usual. Reminds me of the donkey that was hungry and thirsty, but couldn’t decide whether to go to the hay or to the water first. Died of malnutrition and dehydration.

  4. Willy October 7, 2013 at 10:48 am

    Definitely good advice. I’ve been a “potato” for a couple years now, and I believe myself to be generally free of these behaviors at present, however I can clearly remember suffering to some extent from all of these behaviors earlier on. I spent literally days “tweaking” the fine details of my first portfolio (do I put 5% here or there, etc). I poured over products for a long time, etc. I now realize that the outcome would have been very nearly identical had I not done all those things. I still catch myself every now and then over-analyzing something (for example, as I get older, how do I shift my allocation from stocks to bonds, some %/yr, use new money, etc). At this point I’ve trained myself enough to know to remind myself that “it doesn’t really matter – go watch the hockey game”.

  5. Richard October 7, 2013 at 10:57 am

    Speaking of the DIY choice… I’m not sure if you already saw this article but it looks like the high-fee mutual funds are trying to make people feel better about how much they pay:

  6. Neil Murphy October 7, 2013 at 11:04 am

    Great article. I agree it’s hard for investors to believe that, in the end, it’s so simple. I have helped numerous investors set up DIY accounts and I always wait for the light bulb to go on when they go, “that’s it”. But I often remind them that the difficult part will be to maintain their belief in the process and not get torn away from it by the ebb and flow of the stock market and it’s marketing machine.

  7. Lori Napier October 7, 2013 at 11:52 am

    Thanks. I needed to hear this!

  8. Al October 7, 2013 at 11:53 am

    Re: market timing. Is there not capital gain tax assignment for etfs and mutual funds in the 4th quarter? Therefore is it not better at this point in the year to defer investment of bulk sums till Jan to avoid paying capital gain tax on capital gains that were realized by others during the year?

  9. HarveyM October 7, 2013 at 12:01 pm

    A good analysis of investors and explains well why “investing is simple, but not easy”!
    I’ll go out on a limb and say that I don’t think anyone should be a DIY investor! In medicine, they have it right: ‘the doctor who treats himself, has a fool for a patient’! Surely that is true for one’s investments? At some point Dan you too will succumb to that wisdom and get yourself an advisor!

  10. Canadian Couch Potato October 7, 2013 at 12:38 pm

    @Phil: I would say your challenge falls into the category of “resisting simple solutions.” People with large portfolios often think they need to be “more diversified,” to which I have to ask, “More than 10,000 companies in 40+ countries and a dozen currencies, and hundreds of government and corporate bonds across every maturity?” That’s what you get with something like the Complete Couch Potato.

    @Mike: In general, the order of preference for non-registered accounts would look something like this:

    Canadian equities
    US equities
    International equities
    Canadian REITs
    Global REITs
    Nominal bonds (when purchased at a premium)
    Real-return bonds

    Effectively tax-managing non-registered accounts starts with asset location, but it doesn’t end there. I would say this is the single most important place where a good advisor can earn his or her fee. Properly tracking ACBs and using tax-loss harvesting strategies are hugely important, and almost no DIY investors do this properly.

    @Al: Your concern is warranted, but I would not call that market timing. This is out of date now, but it explains the general idea to those who may be curious:

    @HarveyM: I do have an advisor: Justin Bender. :)

  11. aB October 7, 2013 at 12:58 pm

    I’m a new DIYer, the absolute best advice I have ever gotten.
    “Whatever helps you sleep at night.”

    Just trust in the technique, don’t think about it, and just do it. Helped me get started and (so far) stay on track.

    What I find ironic, is the blogs. Yes, they help set the message, stay on track, and provide great swaths of information, but wow, so much information, maybe I should be doing this or that, or read another blog for another take and more analysis. Love it, got to read more. If I spent the time I do reading these blogs doing something else, like sleeping or exercising, I would be much healthier. [Not to say the blogs are bad, just something I have noticed. Love me some personal financial reading.]

    Now to go on some forums and read some more..

  12. Ryan October 7, 2013 at 1:01 pm

    to HarveyM
    Most advisors I know actually do “treat themselves” and manage their own investments. I think a better analogy would be using a real estate agent or a building contractor. Sometimes you get good value for the fees you pay, sometimes not. Value depends a lot on the skills you have as well as the fees they charge.

    I think a lot of investors have lost trust in advisors/planners in general, feel they are not acting in their best interest and are not getting good value for their money. And it is soooo easy to go back in time and compare ROI’s. The numbers don’t lie and can be painful to see.

    Perhaps Harvey one day you too will succumb to the wisdom of DIY index investing and get drop your high-fees advisor. (OK a little confrontational, but he was asking for it Dan).

  13. Tony October 7, 2013 at 3:53 pm

    Hi Dan,

    Thanks for the article.

    I have a theory as to why DIYers do scrutinize their ETF choices and where to place them, in registered or non-registered accounts.
    I learned about index investing about 2 years ago and created an index portfolio at the beginning of January 2012 after agonizing over the smallest things – ETF choice, target asset allocations etc. but I did remember reading that in the long run it shouldn’t matter much in the long run. And this is true.

    However after the initial set up, DIYers realize that index investing is the superior method of investing and want to learn more and more about it. They then start to try and make something happen to what should be a “passive” approach to investing in order to try and maximize the returns on their index portfolios when it will likely not amount to a material difference in the long run. I guess what I’m trying to say is that, for the most part, people have a need to try and marginally improve their portfolios whenever possible. They get excited when a fund comes out with a few basis points lower because in the landscape of index investing, not a lot happens – it’s just the same old buy and hold strategy that works well, but is quite boring to monitor day-to-day. And I understand that’s not the point of a couch potato portfolio, but it’s the result of human nature (at least for a DIYer like me) who has made it a hobby to read up on index investing and when new products come out
    For example, the recent release of 5 Vanguard ETFs in August created a bit of an uproar in the comments section. There’s was a bit of a frenzy as there is potential for marginal increases in one’s rate of return.

  14. HarveyM October 7, 2013 at 4:57 pm

    “Most advisors I know actually do “treat themselves” and manage their own investments.”
    But not good advisors like Dan :), who is wise and uses another good advisor himself! So let’s follow his example :).
    Indeed, there are many reasons to find a good advisor as Dan has and will unfold in these posts. Getting burnt by high fee advisors is not a reason to become a DIY investor! You may then get burnt by a no fee advisor (you) and then whom will you fire! The answer is to find a low fee advisor who uses low fee index funds in a simple portfolio but also has the ability to gage your risk necessity and tolerance accurately toward your investment goals.

  15. Richard October 7, 2013 at 5:13 pm

    Having another person act as an advisor can help if you have psychological barriers that prevent you from doing the right thing. If you have a simple plan like a fixed asset allocation and you follow it consistently, you can get all the help you need by doing a little research at the beginning. Indeed some of the best advice is available in books or on free blogs rather than from a paid advisor who just happens to live near you.

  16. The Esteemed Big Cajun man October 7, 2013 at 5:17 pm

    Hey Spud Buddy!

    Glad to chat with you hopefully we can do that again some time soon, it was fun to watch smart guys answer inane questions from me. The whole DIY world is a tough one, and for me the easier it is, the more likely I am to succeed. I had my chance to make “HUGE PROFITS” in the 90’s and blew that up real good, so I am just hoping to make a nice growth that allows me to retire and enjoy life (which may yet happen).

    Yes, I am changing my moniker to the Esteemed Big Cajun Man

  17. Ryan October 7, 2013 at 8:00 pm

    Well said.
    As my portfolio grows, I’m becoming less keen to manage it myself. I think there comes a time when many DIY investors need to consider how valuable there time is and pass off the managing of the portfolio to a index-based, low-fee based advisor (like income taxes, haircuts, oil changes, etc).
    My wife still cuts my hair by the way.

  18. Be'en October 8, 2013 at 3:19 am

    Good stuff..

  19. Matt Becker October 8, 2013 at 9:26 am

    In my limited experience, one of the most difficult things to convince people of is the effectiveness of a simple approach. It seems like no matter what research you show them, it’s so hard to shake the feeling that the simple strategies are “average” but that they could do better. I think the chase for better is what ends up hurting a lot of people.

  20. Daniel October 8, 2013 at 9:44 am

    Thanks for the article Dan.

    When it comes to DIY investing, my biggest challenge has been learning the ropes. I’ve gotten started with an eSeries portfolio but now I’m not quite sure about the best time to switch to ETFs. I understand that it doesn’t make sense to buy ETFs with a small portfolio, but then at what point does it make the most sense to make the switch?

    If, for example, the threshold to make a switch from an eSeries portfolio to ETFs was $50k, is it better to jump into ETFs when I:

    a) have accumulated $50k across all accounts in the portfolio (i.e. RRSP+TFSA)
    b) have accumulated $50 in one single account?

  21. Canadian Couch Potato October 8, 2013 at 9:50 am

    @Daniel: Good question. I would suggest only moving to ETFs once an individual account is at least $50K. Otherwise it’s not usually cost-efficient to build a diversified with ETFs, especially if you are making regular contributions. Even then, it certainly isn’t necessary to switch to ETFs automatically. If you’re comfortable with the e-Series funds, I would just stick with them.

    If you’re with TD Direct Investing this might be of interest:

  22. Daniel October 8, 2013 at 10:07 am

    @theSpud: Thanks for the suggestion and the linked article. I’ll be sticking with the eSeries fund for a while yet, but combining the funds with ETFs looks like a perfect way to make a transition should that time come.

  23. Francis October 8, 2013 at 1:36 pm

    I am guilty of all the behavior above espescialy the one of resisting simple solution. I read a lot about indexing and I cant help my self that I should do more like investing in a more complex porfolio. Probably because I enjoy to much reading personal finance blog like your and that I yould loved been a financial adviser but realize that I was really bad saleman. Fortunaly, I push the trigger on global potato and still when from a low 5 figure to low 6 figure in about 2 years.

    I could use a dimensional adviser to help me a get acces to strategy similar of uber tuber porfolios that I yould like because their value fund seem to be much better than those I can assess throught etf and I would like a canadian free porfolio and evaluate the cost of currency exchange could be better spend on a adviser. The only problem is they probably don’t want me.

    I know the recommended fund for this strategy is 200 000$ and I target to reach it in one year. Probably everybody will said that performance is not garanted to be better than a global portfolio but I think almost every financial writter fail to explain more asset class give more rebalancing opportunity and they almost report portfolio performance like if you invest 100 000$ 30 years ago and never add anything. I am convince that if am able to invest in the funds that always lag their target allocation, my performance will be lot greater than basic allocation.

  24. SV October 8, 2013 at 6:10 pm

    is it against the couch potato’s way to buy ETF such as SH and DOG to hedge aginst market downturns? I am aware this will reduce returns but it also reduce risks somewhat in my opinion.

  25. Canadian Couch Potato October 8, 2013 at 7:49 pm

    @SV: Shorting the market is indeed contrary to the Couch Potato strategy. If you want to reduce risk with a corresponding reduction in expected returns, the way to do that is simply to reduce your exposure to equity and increase your fixed income holdings.

  26. October 8, 2013 at 9:14 pm

    I would agree a big challenge is sticking with a plan. The most recent example I can think of is being able to tune out the background noise about bonds and focus on the asset allocation to suit risk tolerance or their Investment Policy statement. Sticking to a plan is not easy, even with some professional guidance.

    The focus in the comments above seems to be on actual DIY management of funds BUT we have found that 90% of clients struggle to get off the starting blocks.

    There are numerous challenges to circumnavigate when starting to go the DIY route; old advisors whispering in your ear (and family members!), fund companies taking forever to move funds into a online brokerage, misfiled forms or confusion over what transfer forms to complete, jargon confusion, and funds arriving at different times. We have had cases where legal threats have had to be made before fund companies get their at together a move clients funds….The stress that all these things can create is enormous. Enough for many to throw up their hands and quit when going at it alone.

    We’ve assisted over 100 clients in moving to discount brokerage accounts since 2011. We’ve given clients the education and tools them to get started on their DIY journey and we are there along the way to help out. We do believe that some individuals can do this alone, but not many.
    Even if you can fly solo it is important to have someone to go to for a SECOND OPINION.

    As a fee-only net worth manager I have many other professionals I call upon for second opinions. I may have your accounting/tax answers readily available but that doesn’t stop me getting a second opinion from a tax specialist. Knowing where to look for sound advice is really the biggest challenge financial consumers face today—this is no exception for the DIY investor reading through the 100,000s of financial experts on the web.

    The Eureka route involves a larger commitment from clients (versus the traditional method of being “told” what to do by an advisor), and if you choose to go DIY completely solo it’s a very large time commitment, something you should definitely prepare for. You have to read up on many different subjects to get a “correct” base understanding, and then decipher all the BS out there to find the best route for you. Learning jargon and understanding the industries inner workings is not rocket science but it is very time consuming.

    You need to do a cost-benefit analysis, work out what your time is worth and decide if its better to pay a fee-only professional to help you out or if its time to fly solo. Good luck!

    – Kathy Waite

  27. October 8, 2013 at 9:22 pm

    I look forward to more blogs on this Dan! Very interesting topic and comments!
    – Kathy

  28. Louise October 9, 2013 at 2:07 pm

    Hi Dan,

    My background:
    I had an advisor for 15 years but became disappointed with the lack of his ability to provide portofolio returns, individual asset returns or asset allocation information. Any reports I did receive were incorrect in one or more respects. Lots of promises of lofty returns, when I actually owned high risk leveraged investments with high MERs and incurred years of losses. (the lost decade came up often) The planning was a 5 minute exercise which concluded that I would die with $14M. Needless to say, I have nowhere near that amount and I am 8 years away from retirement. I knew I needed to dump him but I had no idea what to do instead. The fact that I have some much saved at this point is entirely a function of my discipline in saving regularly and staying invested at all times.

    Well, thanks to you, your blog and your book I have made the transition to a DIY investor and it was very painless. I read everything that I could get my hands on and I found a lot of the information found here and in the resources you recommend to be very helpful. TD Waterhouse was great about helping me with the transfers, done in 3 days. Maybe I am unusual but I was nervous about holding all the cash so I immediately invested it into index funds last February and I have not looked back.

    It is great to be in control of my money and to know what how I am doing. I do spend time doing more reading now, looking at the values of what I own and I have realized that the media hype is really just a distraction. Having lived through a few downturns I know I will not panic, though it’s not fun to see the numbers heading south instead of me.

    My advice to those just starting out, the most important thing is to make a commitment to save a certain amount and then just do it. Over time, you will get to the point that your RRSP and TFSA is maxed out and then you have to do some tax planning but don’t let that stop you from starting to save today. Follow Dan’s simple plan, it will work. It does not need to be overly complex.

    Secondly, don’t be afraid to ask for expert advice (and be prepared to pay for it). I understand tax issues, both Canadian and US but the rules are complex so I would recommend seeking out an expert and getting a second opinion if you are not sure.
    Same goes for financial planning, there are a lot of aspects including estate planning, insurance (life, critical illness, long term care etc) and strategies for reaching different life goals which need to be considered. Get some help on the plan and the implementation if you need it. It will cost you upfront but will save you in the long run.

    Finally make sure that you include your spouse in the process, it makes little sense to create this great portfolio for your golden years and then leave your other half in the dark in the event they end up having to manage it on their own.

    Thanks again Dan, your advise has been terrific. Keep up the good work.

  29. David L October 9, 2013 at 4:46 pm

    I have a question on an unrelated matter. I was looking at VUN on Vanguard’s website, under “Characteristics” there are 3,552 holdings, yet under “Holding Details” there are only 1,1106 holdings. It seems like VUN isn’t an exact replica of VTI, but a sampling of the total stock market.

    Maybe I’m thinking too much into it, guess I find investing interesting, thus I’m always looking at ETF details, even though in the long run, it doesn’t really matter.

  30. Canadian Couch Potato October 9, 2013 at 7:37 pm

    @David: I see what you’re referring to, but I think what’s going on is the Vanguard Canada site only lists the largest holdings (at least 0.01% if the fund). VUN actually holds shares of VTI, so the holdings are exactly the same. And the Vanguard US site lists all 3,552 holdings. Not surprisingly, some of them are extremely small: a couple hundred bucks in a fund with $262 billion in assets.

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