Imagine you have $10,000 in your pocket and you don't know what to do with it. Suppose also that you've decided against investing in a week on the Queen Elizabeth 2, and you're willing to wait a few more years for your first pure mohair suit. You've decided to put your money in Mutual Funds, but with over 2,000 Mutual Funds from which to choose, finding the right fund, or the right combination of funds, does not look so simple.
Let's suppose that you're somewhere around 30 years of age, and the $10,000 is all you've got to invest for a while. Your investment horizon, goals and risk tolerance would then determine where you'd put your cash.
Perhaps you're a cautious investor, have modest expectations and just want to put the money somewhere safe for about five years while you save for a house. However you still want to get a better return than leaving your cash in the bank, then Mutual Funds are a good safe haven for you.
You might consider bond or money market funds, but John Phillips, a financial consultant with Wood Gundy in Victoria advises otherwise. "I can't see myself ever recommending a bond fund. All the fund managers do is they go out and buy bond funds, then there's a management fee. You lose the 1½% right off the top. Why doesn't the investor go out and buy the bond themselves?"
For terms of five years or less, Philips recommends a front end load purchase so there's no penalty for cashing out when you want to. "The usual front end fee is 2% - 5%." Phillips recommends that the buyer compare and negotiate the lowest fee possible. "No more than 3% for a 5 year term."
For the $10,000 investor with a 5 year or less time horizon, low risk tolerance, and no RRSP to consider, Phillips would recommend an equal split between each of three globally diversified funds such as AIC Advantage II, Fidelity European Fund, and Templeton International Stock Fund.
Suppose, however, that you want your $10,000 within your RRSP. You're wary of the stock market's ups and downs but you realize that Canada Savings Bonds won't give you the level of return that will lead to a comfortable retirement. You want safety, but you also require some growth, and you're in for the long term.
Beverley Moir, an Investment Executive at ScotiaMcLeod in Toronto, says that such an investor should be inequity funds where you should be able to expect a 10% rate or return, or better, over the long term. For the investor to whom safety is a prime consideration, Moir would recommend large cap. or medium cap. equity funds.
Current RRSP rules allow for only 20% of your eligible investment to be in foreign equities and Moir says that if you're investing $10,000, she'd recommend you limit your foreign content to a few points less than that. "Foreign funds," she points out, "have grown at a higher rate than Canadian funds." So the chances are good that unless you adjust the weighting at the outset, this disproportionate growth will soon give you more foreign content than allowed. You would then have to top up your Canadian holdings or sell off some foreign funds - not a very practical move with a $10,000 portfolio.
Other than that, Moir is not at all shy about recommending that you put your nestegg on just one fund. "Mutual funds are already diversified" she points out. She would recommend up to 20% in a Global Diversified Equity Fund such as those offered by Templeton, Fidelity and Trimark, -- that's your foreign content -- and the balance in a low volatility Canadian equity fund.
Over the long term, you can expect such funds to do well for you. Moir says the "The Rule of 72" will tell you how often you will double your money. Divide 72 by the annual return your funds provide and you have the number of years it will take to make your $10,000 into $20,000. At 10% return it will take 7.2 years, at 15% you'll have it in 4.8 years.
Suppose that you're on the adventuresome end of the Mutual Fund investors spectrum. You're not about to take your cash to a casino or to penny stocks, but you don't mind taking something of a risk in order to get the best rate of return. You want your $10,000 to buy you a few ocean cruises in your old age and you're willing to lock into an RRSP until then.
Susan Arscott, an Investment Advisor with Nesbitt Burns in St. John's says that you should not tie the hands of your fund manager by specifying a specialty fund such as a Far East Fund, or Latin America Fund. For your foreign content, get an International Equity Fund such as Templeton Growth International, Fidelity International or the Trimark Fund which has the mandate to invest where ever they can get the best returns.
For your Canadian content, split the remainder between Canadian funds that have different styles of managers. Trimark Canadian, and Trimark Select, for example have a "buy and hold style" says Arscott.
"Elliot & Page", says Arscott by way of contrast "are sector rotators. They go into the sectors that they believe will be strong over a period of time. Their portfolio of holdings may change a couple of times per year."
"Those two styles compliment each other" pints out Arscott, and "Such a mix of three funds will be a good base on which to build. This is definitely a growth portfolio."