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Wolf or sheep?

Do-it-yourself investing is empowering, but can also be dangerous

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Nathan Moncrief (left) and Josh Olfert at the University of Manitoba's Asper School of Business. They've become successful investors at a young age.


Nathan Moncrief (left) and Josh Olfert at the University of Manitoba's Asper School of Business. They've become successful investors at a young age. Photo Store

Nathan Moncrief and Josh Olfert are would-be wolves of Wall Street and Bay Street.

Or they're simply the alphas of their own wolf packs -- if you will imagine for the sake of metaphor that "the pack" represents their portfolios of investments.

In that regard, they truly are lords of their lairs. And they've done it astonishingly early in life. While many folks spend their lives building up enough investment know-how just to decipher what their advisers are trying to tell them when discussing their portfolios, Moncrief, 26, and Olfert, 18, aim to sit on the other side of the desk some day.

Although they're thousands of hours of formal education away from fulfilling their goals of becoming investment industry players, they haven't waited to build their own wealth, having already established do-it yourself (DIY) investment track records that would impress even battle-tested investors.

"When I was 19, I opened up an account with about $6,500," says Moncrief, who now attends University of Manitoba studying finance. Over the next few years, he continued to save and purchase stocks he felt were undervalued.

"I'm now sitting at more than $420,000 in profits."

This pool of capital pays for Moncrief's education and even supports his young family.

While Olfert hasn't reaped six-figure profits yet, the 18-year-old has grown his portfolio ten-fold in about three years, and he is up before 6 a.m. every weekday trading in stock and foreign currency markets. Recently graduated from high school, Olfert wants investing to be his main gig -- not because he loves money, but because he loves how money is made.

"When I was younger, it never occurred to me you could work at something and enjoy doing it."

This November was Financial Literacy Month in Canada. And while it's almost over, what better way is there to end it than featuring Olfert and Moncrief?

Yes, they are exceptions to the norm. But they are also poster "wolves" (in keeping with the metaphor) for what motivated individuals can do on their own.

In fact, maybe there is a better way to end November: an article featuring tips from Olfert and Moncrief, and a few industry experts to help would-be DIYers hunt down market returns.

What kind of investing beast are you?

Most people may feel like sheep when it comes to investing. While they've spent most of their investing lives led by a shepherd (adviser), they might decide to stray from the flock, going it on their own like a lone wolf. But not all individuals are cut out to be leaders of their pack, says Tom Hamza, president of the Investor Education Fund, which runs the financial education website

"Investing is one of those things where you need to start off knowing what your own capabilities are," he says. "There are a lot of options that will affect the time you have to put into investing, the amount of research you can do and your overall strategy."

Being a wolf takes time to learn. Both Moncrief and Olfert, for example, say they read dozens of books, spent hundreds of hours observing markets and learning everything they could before actually purchasing an investment.

Furthermore, most people are likely happier being part of the flock, best served by being under the guidance of an adviser who takes the time on their behalf to keep abreast of market conditions.

DIY success boils down to passion, Hamza adds.

"It's almost a way of life. Can you commit the time and do you have the analytical capability to do it?" he says. "There are lots of people who want to do it themselves but don't have these capacities."

Still, that doesn't mean even couch potatoes can't be DIYers. They just need the right strategy.

To start, keep is simple

Time truly is money when it comes to investing. The more time you put in, the more you're likely to get out of it. But not every DIYer needs to spend hours reading reports to build a portfolio. Passive investment strategies can be a good fit for an investor who's willing to do a little bit of homework.

This strategy is, in fact, often referred to as the couch-potato portfolio, and if you're starting out, this no-frills approach may be advisable.

"The simpler the investing, the more likely it is you can do it yourself," says Manny Schiffres, executive editor at Kiplinger's Personal Finance magazine.

Passive investing is fairly straightforward. It involves buying an index fund that tracks a market like the S&P 500. As the market goes--up and down--so does your investment. In effect, you're part of the swarm, herd or whatever you want to call it, instead of lone-wolfing it by attempting to outperform the market.

As a passive investor, all that's really required are regular contributions -- dollar-cost averaging -- and rebalancing your portfolio once or twice a year to reflect a set asset allocation.

But how do you determine what your asset allocation is?

Like most aspects of investing, asset allocation can be as complex as you want it to be. But generally, a portfolio is broken into three parts: equities (stocks), fixed income (bonds) and cash.

"This (asset allocation) can be done simply using the old rules of thumb that say the longer before you need your money, the more risk you can afford to take, and that means you can invest in stocks," Schiffres says. "The sooner you're going to need the money, the less risk you can afford to take."

Many people figure out their asset allocation using this simple formula: Subtract your age from 100 to determine the percentage of your money that should be invested in stocks.

This formula is only a basic guideline, and every investor has a different risk tolerance, so individual investors should determine their own asset allocation based on their individual needs.

The most important element of this strategy, however, is regular rebalancing. For instance, let's say you have a 60 per cent stock, 30 per cent bonds and 10 per cent cash asset allocation. During the course of a year, the stock component grows to 70 per cent while bonds fall by 10 per cent. This means at some point, you must sell stocks and buy bonds to restore 60-30-10 split.

Practice makes profit

Bob Stammers, director of investor education with the CFA Institute in New York, says no amount of book smarts can replace the important investment lessons of real-life market experience.

"But the problem with the school of hard knocks is it's a very expensive teacher," he says.

So it's best to start slow. Try opening a paper-trading or fantasy investment account offered by many online brokerages and even financial education sites such as Investopedia.

"I used to teach people how to trade derivatives, and the first thing I used to do is say 'Don't invest any of your money until you've had some success on paper trading,'" he says.

Even successful funny-money trading, however, needs to be bolstered by research. So hit the books. For a start, try reading about the masters: Warren Buffett, Charlie Munger, Benjamin Graham, George Soros, etc.

"I started reading everything I could, and it was about six months before I really thought about investing in the market," says Olfert, adding one of the first books he read was Benjamin Graham's The Intelligent Investor.

Graham is the father of value investing -- a buy-low/sell-high style made popular by Buffett and Munger, who have built their company, Berkshire Hathaway, into one of the most successful investment firms in history.

"My advice would be to study great investors and great business leaders and learn the fundamentals of how they have done it," Moncrief says. "Learn the approach of finding good companies and what makes a good company."

Never mind investment strategies to start, he adds. Studying what makes a good business will lay the foundation for DIYers interested in buying individual stocks and corporate bonds.

But don't stop at books. You'll need to read annual reports from companies, decoding their balance, cash flow and income statements.

Websites such as Investopedia offer helpful tips to understand financial statements and reports. Blogs such as Naked Capitalism, Frankly Speaking and The Big Picture are another important source too. Moncrief says many are written by fellow DIYers with successful investment track records.

"There are some incredible investors who have carved their own niche," he says. "They're not in the spotlight a lot because they're not earning billions of dollars."

But be careful, Stammers says. Be sure to distinguish between advice and information. "Information is 'here's how stuff works,' but advice is a little bit different," he says. "If you're going to get advice or market analysis from somewhere, make sure it aligns with your philosophy and there is no other agenda."

Reward is the name of the game -- just don't forget about the risk

There's an old Wall Street saw, Schiffres says: "Don't confuse a bull market with genius." This statement has weighty meaning for DIYers, especially these days.

"We're in the middle of a tremendous bull market. Stocks are up about 25 per cent this year and they're up about 160 per cent from the bear market low of March 9, 2009," he says about the U.S. stock market.

Ergo, it's been very easy to make money, and neophyte investors can quickly forget that in exchange for the returns they've been enjoying of late, their money is at risk because what goes up eventually comes down.

"It's one thing to say you can invest on your own in a raging bull market, but it's another thing to do it when the market goes down," he says. "Investment success, or a lack thereof, tends to be heavily driven by emotion -- the two main ones being fear and greed."

Understanding risk (in part by paying heed to some of the aforementioned points) helps you ride out storms and avoid doing something stupid like selling instead of buying when stocks are on sale.

To that end, Schiffres offers this analogy:

"When Walmart has a sale, people rush into the store. When the stock market has a sale, it loses 20 or 30 per cent and people bail out," he says.

"They run away from the store when in fact they should be buying because stocks are cheaper, but they're acting on emotion. The fear factor takes over."

If you think you can handle this kind of stress, then maybe you have the wolf-like qualities that make you well-suited for DIY investing. But if you can't, then perhaps you're happier as a sheep under the watch of a shepherd -- frankly, a much better circumstance than that of a starving lone wolf.

Republished from the Winnipeg Free Press print edition November 30, 2013 B12


Updated on Tuesday, December 3, 2013 at 12:41 PM CST: The $420,000 includes profits from additional contributions and stock purchases over time.

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