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By Jonathan Chevreau
National Post
FP Money Section
Saturday, October 16, 2004 |
The other day, I was having a chat with one of my editors. After reviewing recent columns critical of savings bonds, then of hedge funds and finally of principal-protected notes, he posed the question, "Is there anything you DO like?"
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, “If investors had portfolios mimicking something like this, they would do quite well over all.”
Fortunately, I was able to proffer a short list culled from my own portfolio or those of family members. We agreed it might make the basis of a column --the one you're now reading.
Herewith 10 top investments that may have a place in your own portfolio, provided you heed the asset allocation suggestions of your financial advisor. They are ranked in order of descending importance.
1. A paid-up home.
You have to live somewhere. You can either pay a mortgage, or rent and pay your landlord's mortgage. A paid-up home of your own is the best investment. The sooner you pay down the mortgage, the more you'll save in interest payments. Drag it out for 20 years and interest payments may be double that of the home's original purchase price.
Especially in the first five years, spare cash allocated to the annual 10% or 15% paydown privilege will reap far greater returns than any investment Bay Street can sell you.
Once paid off, consider income-producing property or real estate investment trusts (REITs).
2. Cash.
The financial industry portrays cash as "trash" but when you really need it, cash is king. Every family needs an emergency nest egg sufficient to fund three months of expenses.
An ordinary bank account pays almost zero interest. You can do better and get equivalent liquidity with treasury bills or high-interest daily savings accounts from virtual banks like ING Direct.
In addition to "electronic" cash, also consider a small supply of "green cash" -- actual dollar bills stored in a safety deposit box, with perhaps some Canada Premium Bonds. (See suggestion 10.)
3. Ladders of strip bonds.
After home ownership and emergency savings, a Registered Retirement Savings Plan (RRSP) should be a top priority. A core RRSP investment can be strip bonds, which don't pay interest.
Instead, you buy them at a discount from their final maturity price. The effect is the same as receiving interest every year and is taxed as such, which is why these are best sheltered in RRSPs.
This means you'll know exactly how much the investment will be worth at maturity. By "laddering" them so some strips mature each year, you always have funds available for reinvestment or emergencies. This also smoothes out volatility from changes in interest rates.
4. Real Return Bonds.
Traditional bonds, whether nominal or strips, will over time lose purchasing power to inflation. You can hedge against this by including Government of Canada Real Return Bonds [RRBs.] The more inflation soars, the more extra interest these bonds pay. Note these have unusually long maturities.
See Zvi Bodie's book, Worry Free Investing, for more on the theory.
5. Reasonably priced value-oriented global equity mutual funds.
The other major inflation hedge for RRSPs is equities. Since Canada accounts for only 3% of global markets, the 30% foreign content we're permitted in our RRSPs should hold foreign stocks or bonds.
The easiest way to do this is to use global mutual funds (either equity or global balanced funds.) My preference is for funds with reasonable fees which take a "value" approach to security selection.
6. Exchange-traded index funds (ETIFs or ETFs).
Once your annual RRSP contribution is maximized, the next priority is non-registered savings. Because these are taxable, a more tax-efficient vehicle than equity mutual funds is ETFs. These are low-cost stock index funds trading on major exchanges. You can find specialized ETFs to focus on particular geographic regions or economic sectors.
Fees range from 0.17% to 0.55% for the major ETFs sold in Canada; some trading on U.S. exchanges may be closer to 1%. Like any stock, you'll have to pay brokerage commissions to buy and sell.
7. Low-fee Canadian balanced funds.
If you're a parent, education savings are important. Set up a Registered Education Savings Plan (RESP) through a PAC (pre-authorized chequing) arrangements.
A low-fee Canadian balanced fund owns both stocks and bonds and often allocates 30% to foreign stocks, providing both geographic and asset class diversification.
Because of the bond component, low fees are particularly important. Note this approach can also be used for small, but growing, RRSPs.
8. Quality Canadian dividend-paying stocks.
Not to be forgotten in the rush to funds is the security at the centre of most such repackaging efforts: the quality dividend-paying common stock. If it's Canadian, non-registered investors benefit from tax-advantaged income, all without management fees of any kind.
9. Baskets of income trusts.
In this low-interest rate environment, Canadians have flocked to income trusts, which are income-paying equities.
However, individual trusts are tricky to select and any one issue may disappoint. Better to take a "basket" approach and invest in funds providing exposure to all or some of them.
10. Coins, bullion and precious metals mutual funds.
A 5% exposure to gold bullion or gold mining stocks may prove prudent insurance against economic disaster, hyperinflation or erosion of paper currencies.
You could hold gold or silver coins or bullion in a safety deposit box but precious metals mutual funds provide more diversified exposure to this sector.
After drafting this piece, I bounced these suggestions off fee-only investment counsel Adrian Mastracci, of Vancouver-based KCM Wealth Management Inc. His reply: "If investors had portfolios mimicking something like this, they would do quite well over all." |
