[Today’s post is a guest article by a reader who prefers to be called Phil who wants to hear some critical commentary and constructive feedback on his portfolio. He feels that a lot of readers might be in his situation — a recent convert to DIY investing but with a lot of mutual fund investments that are underwater and would benefit from a discussion of his portfolio. The second part of the post will run tomorrow. Over to Phil…]
The idea for this exercise was generated after reading the very popular Amateur Investor Manifesto series of posts in December. I think all readers of the blog benefited from seeing Reader J’s thought process and the reasons behind his asset allocation. One of the things that I thought was missing, however, was a discussion about how to split the allocation across the different types of accounts that are available to Canadian investors (e.g. RRSP, TFSA, RESP, non-registered account, high-interest savings accounts, etc). The other big difference between Reader J’s situation and mine (and perhaps many others’ out there) is that I’m looking to make changes to an existing portfolio (which, courtesy of my former advisor, is weighted about 90% in equities and is down about 28%).
What I’m hoping to get out of this post is candid feedback about where you think I may have gone wrong with my investment strategy, and where you think I can improve.
My wife (Bonnie) and I (Phil) are both 33 years old and we both work full-time. We do not have kids but we hope to start a family within the next 12 months.
Our main short term goal is to save enough money to buy a cottage. Over the longer term, our goal, like that of most Canadians, is to save enough to live comfortably in retirement. I would like to retire at 55, my wife would like to retire from full-time work at 65 and continue working part-time. Roughly 50% of our monthly after tax income is required to meet our monthly expenses. The remaining 50% is free for investing.
Our target asset allocation is 50% Equity, 32% fixed income, 2% cash and 16% alternative investments.
We have been investing since 2007 (up until that point any excess savings we accumulated simply went to debt repayment – we both had large student loans). We spent two years (February 2007 to May 2009) with a Scotia McLeod advisor whose main recommendation (which we followed) was to devote 100% of our monthly RSP contributions to the LifePoints Long Term Growth, a “fund of funds” mutual fund with a heavy (80%) equity focus managed by Russell Investments Canada. The fund has a 2.5% MER and the NAV as of mid-June is about 28% below our average cost. Needles to say, we are very disappointed with the fund’s performance, but we need look no further than ourselves for someone to blame. And to be fair, the fund is not the worst performer in its category. In addition to our monthly RSP contributions, our advisor also recommended that we start a non-registered account, with a starting position of 5 blue chip Canadian stocks (see portfolio section in Part 2 for details).
The advisor got paid by taking one quarter of 1.5% of the market value of our portfolio every three months. In truth, I’m not sure that the advisors’ fees were greater than the trading fees that we would otherwise have incurred had we been investing with a self-directed account. However, we recognized that as portfolio grew every month, the fee-based relationship with our advisor became more and more expensive. The other problem we had was lack of control (i.e. we couldn’t make the trades ourselves and had to call them in real-time, etc.).
While still under the advisory relationship, we took over management of our portfolio in mid 2008 and immediately shifted into ETFs. This was interesting to me because we were in effect eschewing the advisor’s advice yet continuing to pay for it! I’ve been a proponent of passive investing ever since reading A Random Walk Down Wall Street. We completely terminated our relationship with the advisor in mid-June and are now DIY investors with Scotia iTrade.
While we’ve been generally happy with the new direction we set for our portfolio, there are a lot of uncertainties ahead. Our first concern is how to intelligently balance our portfolio. The challenge is that our portfolio has never been balanced, and we’re starting the process in the midst of a recession where most of our equity holdings are underwater. Clearly it’s much less painful to balance a portfolio when one can sell one’s holdings for a profit. Should we continue to buy equities at what could turn out to be historically low prices? This would drive down our average cost and position us well for a market rebound. Or should we buy fixed income to balance the portfolio? And should we buy bond funds or individual bonds?
A second challenge is how to allocate our various positions from a “tax advantaged” perspective across the six accounts that comprise our portfolio. For example, I’ve read that it’s best to hold fixed income in one’s RSP and Canadian equity (especially dividend paying stocks) in one’s non-registered account.
Finally, there’s the issue of our units in the LifePoints mutual fund. It comprises the bulk of the value of both my and my wife’s RSP. Should we buy more units to lower our average cost and speed up our breakeven point (at which point we would likely redeem our units)? This would seem to be throwing good money after bad.
Other issues: are we holding too much USD in our portfolios (e.g. Vanguard ETFs?) The short to mid-term outlook for the US dollar is not pretty. Should we bother at all with GICs? Are the Claymore sector ETFs (e.g. water, agriculture, etc.) too thinly traded to be useful as a long-term investment?
Continued in Part 2