How to Build Your Own Robo-Advisor in Five Easy Steps

I love Canadian robo-advisors. I’m not going to delve into why their strategy, which is to invest in stock market indexes, is attractive to investors. The beauty of a robo-advisor’s investing strategy is that it’s simple…so simple that anyone can create their own robo-advisor in just a few easy steps. Here’s how to do it.

Determine your risk profile

The first thing you need to do to build your own robo-advisor is to assess your risk profile. In other words, determine how much risk you’re willing to take to maximize your potential return. It’s not complicated, but before moving on to the next point, you have to sort things out. Just because you’re parachuting or mixing Red Bull with alcohol (not a good idea) doesn’t mean you should invest in a risky portfolio.

Your risk profile essentially depends on two things. First, your ability to keep a cool head should the value of your investments drop. And secondly, your investment horizon. In other words, if you’re investing for the very long term (a young person investing for retirement, for example) and like Warren Buffett, you don’t worry about fluctuating stock prices, a risky or aggressive portfolio is probably the product for you.

To establish your risk profile, you can go to robo-advisor sites like Wealthsimple. You will find the complete list of Canadian robo-advisors on our comparison tool. Without even opening an account, you can complete their online questionnaire, after which they will direct you to one of their portfolios. Note what kind of portfolio it is. Is it a conservative, aggressive, or moderate portfolio? If you want to get a better idea of ​​the criteria that determine your risk profile, you can also complete this BMO PDF form and then determine your risk profile yourself by calculating your score.

Choose an ETF portfolio on the web

Of course, you can improvise, become your own portfolio manager and build your portfolio yourself. Having said that, there are already plenty of free portfolio templates available on the internet that have been built by professionals.

In Canada, one of the best-known sources is Canadian Couch Potato. The blog’s name is funny, but its author is a respected portfolio manager by the name of Dan Bortolotti, and his portfolios have the advantage of being very simple and inexpensive.

In a similar vein, there are also BlackRock’s portfolio templates, which I like for the same reasons I like those from Canadian Couch Potato. It’s clear that BlackRock only puts iShares ETFs (managed by BlackRock) in its portfolio templates, but they’re not bad ETFs…and like those of other ETF leaders in Canada like Vanguard and BMO, their fees are quite low.

Then, it’s up to you to go and check out the portfolios of the various Canadian robo-advisors and reproduce them through an online brokerage account. These are good portfolios, but they tend to contain a larger number of ETFs, which will make it harder for you as an investor, and which could cost you more money in fees.

Set up an automatic investment plan

So far I haven’t revealed any extraordinary secrets to you. After all, you probably already know that you can copy a portfolio template to your brokerage account. What you probably don’t know, however, is that some discount brokers offer automatic investment plans. Such a plan will put your investments on autopilot, so to speak, which is one of the main advantages of robo-advisors.

The first option is particularly attractive to those who don’t have a lot of money to invest. This is the Virtual Brokers’ Kick Start Investment program, which has the advantage of being completely free if you’re a student or graduated less than two years ago. For everyone else, the program costs $50 per year, which is still not that expensive.

Essentially, the Virtual Brokers program enables anyone to build a portfolio of five stocks, and set up an automatic investment plan of a minimum of $100 per month.

Each month, a predetermined amount is withdrawn from the user’s bank account and their securities are purchased in the same proportion automatically, free of charge. The program allows you to buy both stocks and ETFs, but the limit of 5 securities makes stock investment less attractive, since five securities aren’t enough to diversify sufficiently. That said, this program is enough to put a Canadian Potato Couch portfolio template (3 securities) or BlackRock’s portfolio template (5 securities) on autopilot.

The second option, ShareOwner, can do the same with a portfolio of any size, but its fees are a bit higher. There is no limit to the number of securities you can have in a portfolio, but the number of securities that can be purchased through this broker is limited to a selection of approximately 400 stocks and 50 ETFs (both Canadian and American).

Unlike other brokers, which charge a fee for each security bought or sold, ShareOwner lets you buy a basket of securities for a flat fee of $40. So it’s more expensive than Virtual Brokers, but investors don’t need to plan their investments on a monthly basis. They can do this on a quarterly basis to minimize their costs. In addition, ShareOwner provides an automatic dividend reinvestment service.

If you want to take matters into your own hands, however, you shouldn’t limit yourself to choosing between Virtual Brokers and ShareOwner. You can invest in ETFs with any broker, so go to our online brokers comparison tool and choose the one that suits you best.

Rebalance your portfolio every six months

Unfortunately, no broker in Canada, at least to my knowledge, offers an automatic rebalancing service yet. It seems to me that it should be offered, but until then you’re going to have to do it yourself. There are no rules set in stone as to how often an investor should rebalance their portfolio. Having said that, since I assume you are busy, doing it every six months should be more than enough, especially if you’re limited to investing in index ETFs like robo-advisors.

If you’re unsure why you should rebalance your portfolio, it is very simple. Essentially, this is an important task to ensure that you maintain a consistent portfolio despite market fluctuations.

Still not clear? I’m going to give you an example. Let’s assume that, not wanting to complicate your life, you’ve decided to replicate Canadian Couch Potato’s aggressive portfolio in your account. When you started investing, this is what your portfolio looked like:

Three years later the Canadian economy has stalled, but the Vanguard Global Fund (VXC) has performed very well thanks to the US economy and emerging markets, so you end up with the following allocation in your brokerage account:

In this case, rebalancing your portfolio would amount to selling VXC securities to bring its proportion to 60%, relative to the total portfolio value, and buying VAB and VCN to return to their former proportion.

It’s not rocket science. And if you’re like me and have a short memory, go to futureme.org, a website that lets you send emails in the future, and send yourself emails scheduled for every six months for the next decade (or more, if you’re patient). Your email should state that this is the time to rebalance your portfolio, while also specifying the initial asset allocation. In this way, your current self can call your future self to order…

Forget your money on the stock market

This step is undoubtedly the most important, and it also applies as much to the investor who builds their own robo-advisor as to the one who places their money with a real robo-advisor. If you spend your time looking at your brokerage firm’s app to see how much return your portfolio has made, you’re probably your own worst enemy without knowing it. In fact, if you feel like you’ve had a tooth pulled out every time your portfolio loses half a percent, you’ll end up breaking down and making an irrational decision.

The beauty of putting your investments on autopilot is that you can forget them. And if you forget them, losing half a percent shouldn’t hurt. It’s all the more important to forget about your money placed on the stock market, as one of the most significant risks for small investors is to panic in the event of a crisis, and to withdraw your money from stocks when their price reaches a low.

It’s not difficult these days, as the market has been relatively mild over the past few years. That said, talk to the investors who succumbed to the panic in 2008. These investors will probably never be able to compensate for the loss they suffered in 2008. Those who left their money alone during the crisis have, for the most part, returned to the green a long time ago. If, ultimately, you want to invest through a robo-advisor, don’t hesitate to use this comparison tool to help you choose one. To learn how to choose a robo-advisor, read this article.