Most people have vague, gauzy dreams of what they'd do if they hit the financial jackpot. Get a beachfront bungalow somewhere in the Caribbean, maybe, or finally take an extended European jaunt they've always dreamed of.
Keith McDonnell's dream is highly specific, right down to the engine. He fantasizes about a 1970 Chevelle SS 454, one of the most famous muscle cars of all time, sitting in his garage. "I love the history behind it," says Mr. McDonnell, 37, a Royal Dutch Shell employee who lives in Alberta's rural Leduc County. "In its time, it was the fastest North American production car in existence."
But to bring about dreams like those, Mr. McDonnell and wife, Denaige, first have to get there financially. That's where our portfolio makeover comes in. After all, like most Canadians, the couple has a slew of fiercely competing financial interests in their lives. Along with retirement savings, there's the mortgage nut, a rental property, two car payments, an educational-savings fund for daughter Arcana Shanks (from Denaige's first marriage), and a budding soap business ( BubbleHut.ca).
"That's the number-one challenge, is balancing everything," says Mr. McDonnell, who's a learning adviser at Shell's Scotford Upgrader plant in Ft. Saskatchewan, which refines oil sands. "I want to be a good father, to have a successful business, and to have enough money in the bank if things go south. And I'd like to have everything as quickly as possible."
To achieve that, though, the twosome's portfolios could use a little time in the shop. Mr. McDonnell's investing strategy is somewhat akin to how he would drive a Chevelle: pedal-to-the-metal. He loves having loads of equity exposure, and isn't even fazed by the stock market's recent swoon. "I fly by the seat of my pants, and hope for the best," he admits. "But I don't even know where I stand in terms of risk tolerance – and that's why it's always good to talk to the pros."
Meanwhile Denaige – admittedly a more hands-off investor – is frustrated that she has yet to see much return for her investing troubles. "I figure 20 years is enough time to start to see stuff growing," she says. "But I've still only got whatever I've put in. So maybe it's time to change up my investing profile."
Enter our two financial advisers: Monique Madan, a fee-for-service planner in Thornhill, Ont., and Paul Bourbonniere, co-founder of Polson Bourbonniere in Markham, Ont. We broke down the details of the McDonnells' portfolios, and asked our chosen planners for a few tips on where they're going right – and where they're going wrong.
$46,000 in Keith's defined-contribution pension
$38,000 in Keith's RRSP
$20,000 in Denaige's RRSP
$7,300 in daughter's RESP
$6,000 in a brokerage account
$2,000 in Shell stock
- Trim back Keith’s main RRSP fund. About 73% of Keith’s RRSP holdings are in a single balanced fund. It’s not a bad selection – it performs close to its benchmarks – but that kind of heavy exposure can be dangerous, if the fund manager leaves or if it lags the market for whatever reason. She’d chop it back to about 35% of his portfolio, and slot the remainder into a broad-market index similar to iShares’ XIU, which is comprised of the 60 largest stocks on the TSX.
- Don’t touch the bonds. About 27% of Keith’s RRSP holdings are in Canadian bonds, in the form of two Phillips Hager & North funds. Given Keith’s self-identification as a highly aggressive investor, that allocation could be considered high. But in volatile and uncertain times like these, Ms. Madan says a healthy portion of fixed income gives his portfolio needed ballast. Her opinion: Stick with ‘em.
- Crank up contributions. Since they’re both only 37, the McDonnells have made a decent start in their retirement savings. But they could be much further along. That’s because the Bubble Hut business has siphoned off about $100,000 in cash over three years, and it’s not yet a big moneymaker. Ms. Madan says the couple should give themselves a deadline for deciding whether the soap business is a long-term winner, or if it’s time to cut bait. Because if it doesn’t pan out, they could redirect those resources towards maxing out their RRSPs, thereby supercharging future returns.
- Rework the pension holdings. Keith’s defined-contribution pension is a healthy sum at almost $50,000, but it’s split between a mishmash of funds. Included is a 2035 target-date retirement fund, but since it is such a small percentage (around 10%), better to sell it off altogether. “With lifecycle funds, either you buy in or you don’t,” says Mr. Bourbonniere. And a high portion of the pension holdings (30%) is in cash, which doesn’t make long-term sense. With those assets, build a better mix starting with a 60/40 split between equities and bonds. Within the equity portion, aim for an equal weighting between Canadian, U.S., and international (non-U.S.). Right now the pension holdings don’t boast any American exposure at all – a major deficiency.
- Start tweaking the educational savings. Arcana’s RESP is heavily invested in global and Canadian dividend funds, which is fine for now. But at 13, college isn’t that far off, and so the couple needs to begin a gradual shift toward more stable investments. Because if equities take a dive just as Arcana enters her college years, her RESP could dry up in alarming fashion. Right now it’s about 13% in a GIC, which they should supplement in coming years with fixed-income or money-market funds. Says Mr. Bourbonniere: “You don’t want to be in the position of having to sell at the worst possible time.”
- Ratchet back Denaige’s RRSP risk. Denaige sees herself as a slow-and-steady brand of investor, but her RRSP is built for speed. At 90% equities, it’s a roller coaster on the way up – and, with the current market trajectory, on the way down. Better to dampen the portfolio’s volatility by adding a dose of bonds and GICs. She doesn’t necessarily have to sell off her current funds (especially at today’s depressed valuations), but simply earmark her future contributions – which she estimates will be around $12,000 a year – for less thrill-seeking investments.
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