Sandy was unhappy with her investment adviser because he called her at most twice a year and collected more than $200 last year in fees and commissions.
So she opened an account at a discount broker and plans to manage her savings herself. "Before I do anything foolish, I would like to have some expert advice on how to map out an investment strategy," Sandy wrote in an e-mail.
At 46, she is single with no dependents and earns about $80,000 a year. She has a condo in Toronto for which she paid about $303,000 with a mortgage of $242,000.
Sandy's savings include a deferred profit sharing plan with her employer that is run by a professional pension fund manager; a locked-in retirement account from a previous employer worth $12,000 invested in two mutual funds; a registered retirement savings plan worth $45,000 that holds some stocks, one fund and some cash; and about $40,000 in cash.
We asked Kurt Rosentreter, a senior financial adviser with Manulife Securities in Toronto, to look at Sandy's situation.
WHAT THE EXPERT SAYS
While Sandy is looking mainly for investing advice, she has some basic financial planning issues to consider first that will inevitably affect her investing, Mr. Rosentreter said. "I'm all for home ownership as a cornerstone to common-sense wealth building, but this is a whopper of a mortgage for a single person earning $80,000 a year with no pension for the future."
The problem is that Sandy may not be able to pay off the mortgage and save enough to retire within the 20-year time frame she has set, he added. "What about replacing vehicles and the odd big vacation?"
Sandy is aware of this, and includes among her longer-term goals selling her condo and purchasing a smaller one with more manageable carrying costs "with retirement in sight."
Among her shorter-term goals is an emergency fund equal to a year's net income. Three months' worth of income should be enough, the planner says. He suggests she tuck away $10,000 ($5,000 for each of 2009 and 2010) in a tax-free savings account for emergency use, and that she drop her term life insurance and take out disability insurance instead.
As for investing, her first step might be to draft her own investment policy statement summarizing "who she thinks she is as an investor," Mr. Rosentreter said. (Samples can be found online.) This statement would serve as a framework when it comes to buying securities. It would also serve as a measuring stick for progress and a rebalancing tool over time.
Sandy might want to allocate her investments by goals. For retirement: RRSP, locked-in retirement account and deferred profit-sharing plan. For emergency funds: TFSA and savings accounts. And other savings accounts for travel or a new car. Then she can build an investment plan that reflects each goal separately; for example, well-diversified, low-cost, long-term holdings for retirement, and short-term deposits for emergencies.
She will need to come up with a strategic asset mix - a balance between safe, fixed-income savings and riskier stock market savings - that reflects her stage in life, goals, risk tolerance, tax bracket, liquidity and cash-flow needs, target return expectations and degree of sophistication.
"At 46, her plan to be 100-per-cent in stocks is reasonable, but could be very volatile," Mr. Rosentreter said. "She needs to make sure her desire for big returns matches her gut-check comfort with volatility."
Sandy's plan to become increasingly more conservative in her investments as she grows older also makes sense, he said. A 50-50 balance would be suitable for a person approaching retirement. "But she should never go to 100-per-cent bonds" because even a small stock market investment will help insure her income keeps up with the rising cost of living over time, he said.
Sandy has a clear dislike for mutual funds, yet she is just the type of person - a novice investor with a small portfolio - for which they were designed, he said.
"Mutual funds do exist with low-cost, good long- and short-term results, that manage risk and taxes and offer a simple yet professional way to invest," Mr. Rosentreter said. More important, they offer diversification among hundreds of stocks, lowering risk and smoothing volatility. Exchange-traded funds are a suitable alternative.
Research has shown that holding 18 to 30 stocks is necessary to provide suitable diversification, he said. "Stay clear of holding too much in a single stock."
The Person: Sandy, 46
The Problem: How to build and manage her own investment portfolio of individual, blue-chip dividend-paying stocks.
The Plan: Write up an investment plan, choose among top-quality stocks and don't close the door to low-fee mutual funds and ETFs. As time passes, shift to a more balanced portfolio.
The Payoff: Steadily growing retirement savings without high mutual fund fees or too much risk.
Monthly net income: $6,870, including rental income.
Assets: Condo $302,990; deferred profit sharing plan $79,050; cash $40,000; RRSP $45,000; locked-in retirement account $12,000. Total: $479,040.
Monthly disbursements: RRSP contributions $1,800; food and eating out $200; clothing $45; medical, drugs, dental $15; mortgage $2,800; condo fees $565; property tax $185; house insurance $15; utilities $40, telephone, cable, Internet $100; replacing furniture and appliances $40; entertainment, music, books $170; education tuition, books $250; auto expenses $330; taxis, subway $50; life insurance $45; donations $50; gifts $40. Total: $6,740.
Liabilities: Mortgage $242,126.
Special to The Globe and Mail
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