Recently the Financial Post featured a couple who are excellent savers but have experienced quite poor returns as investors in its Family Finance column (High savers need to enjoy the present, July 25, 2010). Despite arriving in Canada just two decades back with little to their name apart from their training and education, they have achieved a substantial measure of financial security. But though they’ve saved substantial sums (excluding both their defined-benefit pensions), they are disappointed with their investments. The reasons are not hard to find:
Too many mutual funds
The couple own 40 mutual funds between them. Talk about diworsification! With that many funds, it is very hard to determine their current asset allocation, let alone tracking and monitoring their portfolio. Five to ten funds should be plenty for most investors.
Incorrect asset location
The column notes that the couple hold the bulk of their assets in the form of GICs and cash in the most terrible place possible — their taxable accounts. The best locations for GICs and bonds are tax-sheltered accounts such as RRSPs and TFSAs. If both these accounts are maxed out, long-term investors should seriously consider taking on more risk and holding Canadian stocks in taxable accounts as the return from GICs in taxable accounts after taxes and inflation is likely to be negative.
It is not enough to establish a good savings habit. It is just as important to grow those savings through intelligent investing.