Guest Articles

Portfolio Case Study 1, Part 2

July 13, 2009

24 comments

[In yesterday’s post, Phil gave us some background on his situation and his portfolio. Today, he talks about how current holdings are split between his and his wife’s registered and taxable accounts.]

Our Portfolio
Our portfolio is comprised of six different accounts. I’ve listed our target weight and the actual market weight of each security as of June 15/09.

Phil’s RSP
Below are the holdings of my RSP, with target weights and actual weights (both expressed in terms of the overall value of the account, not the portfolio as a whole). The securities marked with a * are the ones I plan to sell as soon as I can cover my average cost. I have made several mistakes in assembling this portfolio. For example, I bought XSP and XIN before I learned about the cheaper USD denominated alternatives. The clear message I get from looking at my RSP portfolio is that I need to dramatically bump up my fixed income.

Security Target Weight Actual Weight
Candian Equity 8% 26%
XIC* – 0%
XIU – 3%
XEG – 5%
XIC – 15%
XIU – 5%
XEG – 6%
US Equity 19% 17%
VTI – 7%
XSP* – 0%
CLU – 8%
VBR – 4%
VTI – 5%
XSP – 2%
CLU – 5%
VBR – 5%
International 14% 6%
VEA – 7%
XIN* – 0%
CIE – 7%
LifePoints Fund* – 0%
VEA – 0%
XIN – 6%
CIE – 0%
LifePoints Fund – 34%
Emerging Markets 9% 4%
VWO – 5%
CBQ – 4%
VWO – 4%
CBQ – 0%
Fixed Income 32% 5%
Govt. Bonds – 5%
RRBs – 5%
Corporate bonds – 5%
Preferreds – 3%
XCB – 2%
Short-term GIC – 4%
Mid-term GIC – 3%
Long-term GIC – 3%
XCB – 5%
Cash 2% 5%
Alternative Investments 16% 5%
XRE – 5%
GLD – 5%
CIF – 2%
CWW – 2%
COW – 2%
XRE – 3%
CWW – 2%

Bonnie’s RSP
Like my RSP, Bonnie’s RSP is almost 40% tied up in the Life Points fund. Bonnie has more protection on the fixed income side with a 3 year GIC from TD Mortgage Corp and a corporate bond from Scotia Capital (maturing in 2011), but apart from that our RSPs are very similar. Like my RSP, the investment horizon for this account is definitely long term (+30 years). [Ed. Note: For the sake of brevity, I’ve dropped the actual allocation but it is similar to Phil’s table above]

Security Target Weight Actual Weight
Candian Equity 8% 16%
US Equity 19% 11%
International 14% 52%
Emerging Markets 9% 7%
Fixed Income 32% 12%
Cash 2% 0%
Alternative Investments 16% 3%

Joint Non-registered brokerage account
This account is in shambles. In addition to putting us in the Life Points fund, our advisor also suggested we dump a sizeable sum on a basket of six Canadian securities (CIBC, Royal Bank, TD Bank, Potash Corp., Shoppers Drug Mart plus Enbridge, which I recently sold for a small profit). The US ETFs are pet projects of mine and have taken a big beating in recent months. I do not think 5 stocks (or 7 if we include the ETFs) are enough to eliminate market risk (especially since 3 of them are in the same industry – Canadian banks). I don’t even feel 100% comfortable holding individual stocks, but if one wants to go down this path a much broader basket is needed. [Ed. Note: The Canadian Equity portion targets consists of 2% each in Royal Bank, TD Bank, Potash Corp., Barrick, Encana, Shopper’s Drug Mart, Canadian Hydro Developers, Rugged.com plus XIC, XEG, CDZ and CPD. The US ETFs include VTI, PZD and PBW].

Security Target Weight Actual Weight
Candian Equity 46% 96%
US Equity 9% 4%
International 4% 0%
Emerging Markets 4% 0%
Fixed Income 20% 0%
Cash 12% 0%
XRE 5% 0%

Phil’s TFSA
My TFSA is currently empty. In a very foolish attempt to time the market, I liquidated my TFSA account in early January and put all of it into HOU, a leveraged ETF offered by Horizons Beta Pro that is long on oil (NYMEX crude futures). I made the trade through an account with Questrade (See Questrade Review). I have not included the Questrade account in my portfolio because I intend on shutting it down once (and if) HOU returns to my average cost. It was very foolish to get involved with a product I didn’t fully understand (e.g. I’m not convinced HOU actually does what it says it does). So it’s a waiting game for now.

Bonnie’s TFSA
We made the full contribution to this account (ING High interest savings) in January but subsequently withdrew the full amount to put against our mortgage. We are waiting until 2010 to re-contribute. Our intention for both TFSA accounts is to concentrate on building a bond ladder through direct bond purchases.

Joint Savings Account
Come June 2009, our intention is to plough anything we have leftover (after monthly RSP and TFSA contributions and a small contribution to our non-registered account) into this account. We would like to build a large cash cushion to prepare for a potential maternity leave and to save for a hopeful cottage purchase one day. The yields right now are very low but I’m OK with this because it’s risk free (if and when our balance ever exceeds $100 k we will open an account at another branch, or open individual savings accounts, etc. so as to qualify for full CDIC protection)

What we are hoping to get is candid feedback on the target weights of the securities in our portfolio, our choice of securities and our strategy with respect to spreading our investments out across the six accounts that comprise our portfolio.

Portfolio Case Study 1, Part 1

July 12, 2009

23 comments

[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.

Background
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.

Objectives/Constraints
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.

Asset Allocation
Our target asset allocation is 50% Equity, 32% fixed income, 2% cash and 16% alternative investments.

History
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

Mortgage Insurance versus Life Insurance

April 22, 2009

38 comments

[Ray of Financial Highway is the author of today’s guest post. He is a financial industry insider who has worked as a mutual fund and life insurance sales representative and is currently working towards getting a Certified Financial Planner designation.]

I have pointed out many times that insurance is an important part of your financial plan; it is there to protect you and your family should the unexpected happen. However, many families, unfortunately, have found out that it does not always work that way. The issue here is Mortgage Insurance sold by banks and mortgage brokers. Ellen Roseman recently wrote in The Toronto Star about the experience of the Feldman family, who have been paying premiums for years but their claim was initially denied. The Feldmans did get their claim paid out on “compassionate grounds” after The Star got involved, but many families have not been so lucky.

Working in the insurance industry, I have seen too many families being unaware of the dangers of mortgage insurance. Insurance is a complicated topic and the mortgage professionals who sell these products are usually not trained or licensed to sell life insurance. I strongly recommend that you do your homework and deny any insurance offered by your mortgage lender.

In this post, I will point out some of the differences between the insurance you purchase with your mortgage and one purchased from an insurance company.

Post Claim Underwriting

The biggest issue with insurance from the bank is that they have post claim underwriting, which basically means that the underwriting will be done after a claim has been submitted. Technically you could be declared uninsurable after you have submitted a claim and your claim denied as happened to the Feldmans. If you purchase it directly from your insurance agent, all underwriting will be done before the policy is issued. Therefore you know your claim will be paid out when needed according to the terms of your contract, unless fraud can be proven.

Other issues with Mortgage Insurance

  1. Beneficiary is the lender. With life insurance, you select the beneficiary.
  2. Insurance amount decreases with your mortgage, but premiums stay the same. With life insurance, your coverage and premiums remain the same.
  3. Not transferable to new lender.
  4. Payout can be used only to pay the mortgage.
  5. Cannot change policy if situation changes. Policy can be modified as needed.

If you need insurance to protect your family, speak to a qualified insurance advisor to determine the appropriate insurance coverage for your family. Many opt for Mortgage Insurance tempted by the very low premiums but these low premiums come at a huge risk and a few extra dollars saved today could cause your family great pain in the future.

You may also want to check out a story that CBC Marketplace ran on this topic titled In Denial about a year back.