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The Q&A box is filling up more quickly than usual these days so let’s get to the latest batch of your questions.

Portfolio for son

Q - My son will turn 18 in the fall and I would like to build him a portfolio. It’s a small amount, but, time being on his side, should I focus on buying indexes, individual stocks (banks, telcos), ETFs? This is money he won’t need in the near future, but again the magic of dividends could help a lot. - Bobby S.

A – Since the amount is small, I would focus on exchange-traded funds (ETFs) at the outset. This will provide more diversification than individual stocks and will be cheaper than mutual funds. Start with three basic ETFs that, together, will provide global exposure.

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I would suggest investing half the portfolio in an ETF that tracks the U.S. market, since it has been the best performer in the industrialized world in recent years. One possibility is the Vanguard S&P 500 Index ETF (VFV), which has a low management expense ratio (MER) of 0.08 per cent.

Invest 25 per cent in a fund that tracks the S&P/TSX Composite Index, such as the iShares Core S&P/TSX Capped Composite Index ETF (XIC). It has a MER of 0.06 per cent.

Put the other 25 per cent in an ETF with a global focus. One example is the BMO MSCI EAFE Index ETF (ZEA). It’s more expensive, with a 0.22 per cent MER, but it offers broad international exposure and is ahead about 13 per cent so far this year.

I would not suggest holding any fixed-income securities, given your son’s young age. As the portfolio grows in value over time, he can add more asset diversification but for now keep it simple and equity focused. – G.P.

Tax-effective withdrawals

Q – I have topped up my RRSP, TFSA, and non-RRSP money. I took retirement about two years ago at age 55. For the best tax implication, which order should I take the money? RRSP first? Last? The order? Thanks. – Arlene W.

A – Normally, my advice would be to leave money tax-sheltered for as long as possible, which would imply using the non-registered funds first.

However, in this case you need to do some creative planning. You are not old enough to draw old age security yet but when you reach age 65 any money withdrawn from your RRSP (or subsequent RRIF) will count as income and could push you into clawback territory. This year that threshold is $77,580. Inflation will move it higher by the time you are eligible. The surtax is 15 per cent on every dollar of income above the threshold, over the above your marginal rate.

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If you believe you will be over that income level at age 65, then I suggest you draw down your RRSP first to avoid the clawback. If your income is unlikely to be that high, use your non-registered funds first, since they attract tax for any dividends, interest, or capital gains that you earn. Keep your TFSA until you absolutely need it. Any money withdrawn from it will not affect your old age security. – G.P.

Which measure is best?

Q – There are several ways to try to find what is a fair price to pay for an equity, but I would like to ask which one do you use and prefer most? – Tony M.

A – Stocks can be analyzed in many different ways. There have been many books written on this subject, with about as many theories as to the best approach. Over the years, I have observed that there is no one size that fits all when dissecting the equity market.

For example, my number one focus when I look at a company’s financial reports is the bottom line. What are the net earnings, and how do they compare with the last quarter, last year, or five years ago? If they are not growing at a satisfactory rate, it raises questions about the future of the company and the direction of the share price. On that basis, the price/earnings (p/e) ratio of a stock is my key go-to number in determining where to find value for money.

That said, some of the best-performing recommendations in my newsletters have p/e ratios that are off the charts or even non-existent (the company isn’t profitable). Amazon.com is a case in point. When I first recommended the stock, in January 2017, it was priced at $817.14 and had a p/e ratio of 182.80. I cautioned readers about this at the time, but still rated the stock a Buy because, as I wrote, “I happen to believe it will be even more pricy a year from now”.

Today, the stock is trading at more than double the original recommended price. The p/e has improved, but it is still very high at 79.13. If I had focused exclusively on the p/e ratio, I would not have recommended the stock in 2017 nor would I do so today. And a lot of readers would have missed a profit opportunity as a result.

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So, what’s the bottom line? Don’t be dogmatic when it comes to analyzing stocks. Look at the big picture – what a company has done so far and what it is poised to do in the future. You won’t always make the right call – no one does. But you’ll be right more often than not. – G.P.

Where to hold cash

Q - Like many we are starting to hold significant amounts of cash in all our accounts (RRSP, RRIF, and TSFA). We would appreciate knowing your advice on what to hold the cash in to at least earn something while we wait for more buying opportunities (perhaps early in the New Year) and further stabilities to occur (tariff and trade settlements etc.). We’re pretty open minded, however tend to be on the conservative side with investments (generally preferring value for long term with a touch of growth) and always appreciate keeping our costs associated with such investments to a minimum.

Thank you in advance for sharing your thoughts. - Dave L.

A – With interest rates so low, the best place for cash right now is a high-interest savings account. But you have to turn to smaller financial institutions like credit unions or on-line banks to get the best rates. That means paying closer attention to deposit insurance coverage – is your money protected by the Canada Deposit Insurance Corporation (CDIC) or by a provincial program? The CDIC is an independent Crown corporation, established in 1967. As such, it is backed by Ottawa and protects your deposits (principal and interest) up to $100,000. You can find more details here.

Some provincial plans offer higher coverage limits, but their financial backing is not as strong and varies between provinces. Ask for specific details if you are consider going that route.

The best return I can find at present is from Motive Financial’s Savvy Savings Account, a 2.8 per cent. Rate changes can happen any time with high-interest savings accounts, so you have to stay on top of them. Motive Financial is an on-line division of Canadian Western Bank, so your money is protected by CDIC.

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EQ Bank, the on-line operation of Equitable Bank, is a close second with a rate of 2.3 per cent, tied with Oaken Financial. They are both covered by CDIC.

High interest accounts usually come with restrictions, such as a limit on the number of cheques you can write, or may have a limit on the amount you can deposit. Some are not be available for registered accounts – EQ Bank does not offer RRSPs or TFSAs whereas Motive does. Each company has its own policies, so you’ll have to do some research. – G.P.

Replacing Dream Global

Q – I hold Dream Global REIT (DRG.UN) in a TFSA and have been very happy with its yield and capital appreciation. I am debating selling before the sale to Blackstone goes through but am looking for ideas to reinvest the proceeds in something somewhat equivalent in terms of yield. My current yield is about 4.6 per cent but as I’ve held it for 2+ years and reinvested the dividends, my yield based on purchase price is higher. Appreciate any thoughts you might have. – Robb H.

A – Two years ago at this time, Dream Global was trading at $11.24 and yielding 7.1 per cent. There are a few Canadian REITs that yield more today – you can check the list. However, exercise caution with higher-yield entries – the market is telling us something.

One that you might want to look at is True North Commercial REIT (TNT.UN). I recommended it in my Income Investor newsletter on Oct. 13, 2016 at $6.34. It was trading at $6.93 at the time of writing, with a current yield of 8.3 per cent. Keep in mind that I rate this as higher risk.

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If you want something less risky, but with a lower yield, look at Northview Apartment REIT (NVU.UN). It is trading at $28.91 to yield 5.65 per cent. It has been one of my recommendations since 2004 so obviously I have a lot of confidence in it.

Disclosure: I own units of Northview. – G.P.

If you have a money question you’d like me to answer, send it to gpape@rogers.com. Please write Globe Question on the subject line. I can’t guarantee personal replies but I will answer as many questions here as possible.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

Editor’s note: An earlier version said the OAS clawback threshold for this year is $75,910. The 2019 threshold is in fact $77,580. Also, an incorrect savings rate was earlier given for Motive Financial's savings account.
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