Risks of Self-Managed Portfolios

Risks of Self-Managed Investment Portfolios

Self-managing your portfolio can be rewarding, as long as you understand the risks involved and can find help for any additional financial concerns. Unfortunately, expats and snowbirds have special risks with self-managing their investments that they may not be considering when they leave home.

The arguments for self-management are straight forward…lower fees, being your own boss, making your own decisions, being able to trade quickly when you need to…and ultimately making more money with your portfolio. Some people just love to do it. It all makes sense.

However, the risks, especially for non-residents, require us to consider the implications of self-managing a portfolio, not the least of which is how it might impact our spouse-partner in the event of death or serious illness.

Saving Fees

Let’s look at making more money. We all know that one of the biggest motivators for self-management is saving money on fees. But, that is only valid if your portfolio is not hitting its target. Ask yourself, what do I need in my jeans from my portfolio in order to live my desired lifestyle? If the answer is 5%, then any portfolio providing 5% after fees is suitable regardless of fees…provided the risk is the same. Fees, no fees, low fees, high fees...it doesn't matter. It's 5% for you...net.

If you could find the same low-risk investment that paid 20% after fees, would you care about the amount of fees? Of course not.

Risks With ETF’s and Index Funds

Self-management requires that you be active and monitor markets so that you can respond to shifts in direction or sentiments. Some investors feel the answer to that challenge is to invest into ETF’s or index funds.

The advantages of ETF’s are well known. Sure, they have lower fees than mutual funds; trade like stocks; and potentially have lower capital gains exposure for buy-and-hold investors, for example. But they are not the answer for unsophisticated investors. ETF’s require your active management and ETF’s have risks, dozens of them. Index funds are similar.

Market Risk is probably the biggest risk with an ETF or an Index Fund. They are only a wrapper for the underlying investments. If you buy an S&P 500 ETF or Index Fund and the S&P drops 50%, you’re in trouble. Remember 2008? You can read more about ETF Risks at ETF.com

Again, you need to ask yourself what you are trying to achieve, at what risk. Do you have a target return for your portfolio? Or, be honest with yourself, is it just that you hate fees and will do anything to avoid them no matter what the risks? Your portfolio priorities should be (1) controlling risk and (2) achievable return for that amount of risk. Once you have set your target return, look for the lowest possible risk that achieves that return. Fees are just mud in the water.

Special Risks for Non-Residents

The biggest risks of self-managed portfolios for the non-resident is exactly that….self-management. The portfolio depends upon you. Without you, what happens?

Assume you are smart, agile and a successful investor. You are in Mexico enjoying retirement. You become incapacitated, or worse yet, you are killed or permanently out of commission. You can’t manage your portfolio, so who will? Does your spouse or partner know how to take control….or will it even be possible to take control? If markets are in trouble and you're not available, your portfolio may be forced to ride it down! It happens.

That scenario becomes more complicated by the fact that a non-resident of Canada cannot simply open new managed investment accounts in Canada, although some firms will allow new online trading accounts to be opened. So even if your surviving partner wanted to move away from self-management, they may find it next to impossible to accomplish. By the way, getting a Power of Attorney held by a Mexican resident recognized by your financial institution can also be a nightmare, so that definitely is not the easy answer.

There’s more. In the event of death, the holdings within your self-managed accounts cannot be sold or place into cash until your executor has been appointed and given control over the account. That can take weeks if not months. If your Executor is a non-resident, it is even more complicated. If markets are in trouble, your survivor may be forced to ride it down!

Don't believe it? Check the rules with your investment house. This should be a real concern for any non-resident who self-manages their portfolio.

On Soil Rules

Another complicating factor when self-managing your portfolio from outside of Canada is that you cannot give verbal buy-sell instructions to your financial institution. Everything must be done in writing. So much for being able to react or trade quickly.

Some institutions will not allow any trades unless you are in Canada (on Canadian soil) and visit their office in person. We have seen it happen.

Once you declare non-residency and provide your Mexican address, you may even be advised by your financial institution that your accounts are frozen...or that they are being closed. Their brokers and advisors are not usually licensed to manage accounts for Mexican residents. We've seen this happen too.

The only real option is to have an online trading account that you manage yourself without advice from a licensed advisor. And that brings us full circle back to the question, what happens if you are incapacitated?

The Bottom Line

Honestly, for those who do not have the time to devote (can be several hours a week for long-term investors), paying for active management is not a bad strategy, especially if you can achieve the return target to support your lifestyle. For non-residents, the risks of a Self-Managed Portfolio make them less than the best choice.

Ask yourself, are fees my only motivation? What do I really need from my portfolio in order to live my desired lifestyle? Do I really want to accept the risks associated with self-management?

After reading all of this, if you still are inclined to self-manage, contact a Canadian financial advisor for some suggestions on how to set up a fallback strategy.

For one alternative portfolio strategy, check out How to Buy a Pension.

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