This & That: Investing Edition

S Wrote: We have 60% of aggressive investments in our mutual funds. However, we are now at an age that requires us to be a little more conservative (about 60). Now we want to adjust our investments to 40% aggressive and 60% balanced. How are we going to make this adjustment? Is it better to move some portion out of the sum of the aggressive investments, or to reallocate the ratio of the monthly contributions? For instance, if we have $100, 000 in our mutual funds investments, which are made up of $60,000 in equity investments and $40,000 in bonds and money market investments, is it good that we move $20, 000 from equity investments to bonds investment? Or is it better just to adjust our monthly contributions ratio, say changing our 60% for equity and 40% for bonds and money market to 40% for equity and 60% for bonds and money market? Or do we have to do both, i.e. to move some portion out of the sum of the investments and at the same time to change the ratio of the monthly contributions. Without enough knowledge of investments, we cannot have a clear picture of the results of these options. We would appreciate it very much if you can assist us to make a wise decision.

Gail Says: Why not look at your portfolio to see where you’ve had the biggest wins. Move 50% of that money to the more secure investment options. Target the remaining mutual funds (the non-winners, if you have them) so that as they ‘recover’ or hit the marks you’ve set for them, you move that money to investment options more in keeping with your higher need for security. In the meantime, readjust your investment contributions so that you will hit your new asset mix goal by a specific deadline.

 

K Wrote: Currently, a large portion (60-70%) of my RRSP investments are invested in guaranteed GIC’s. The interest rate is very low however the investment is safe and guaranteed by CDIC.

My financial advisor is encouraging me to invest solely in mutual funds as the funds offer much better returns. The mutual funds are not protected by CDIC.

I am 45 years old and looking at working and investing for another 20 years. Should I leave my investments in low earning GIC’s where they are protected by CDIC or should I move them into mutual funds where there is more opportunity for growth?

Gail Says: This is a question only you can answer. The CDIC thing seems like such a huge deal for you I’m going to guess that the idea that you might lose money is pretty scary. If you’re contemplating investing in anything (including GICs) you must answer 3 questions for yourself.

The first, “How long until I need to use this money” is easy because you’ve already told me you don’t need the money for 20 years. That’s a long-term investment horizon and let’s you go with just about anything you want.

The second question, “Can I explain this investment to a 12-year old” speaks to how knowledgeable you are about investing. You should never buy anything you do not completely understand. A cursory understanding as in, “This is an investment that may make me more money,” isn’t really “understanding”. You need to know how mutual funds work, what kind of mutual fund you’re buying (there are thousands of options), how the underlying investments in the mutual fund react to things like changes in interest rates and other economic conditions, what the fees are both in terms of commissions and management expenses.

The third question, “How big a chicken am I” is the one where people often delude themselves. Go a get a copy of Never Too Late from the library and review the questionnaires I’ve created there to see just how much of a risk-taker you are, or how safety-oriented you are. The book will also help you decide how high up on the investment pyramid you can go.

 

J Wrote: I have spent most of my life being financially irresponsible. Over the past couple months I have created a budget that only needs minor tweaks and a debt repayment plan that will have me in the black within 18 months. I am also contributing to savings but would like some of that money to be invested. And this is where the problem is. I know nothing about investing. I have RRSP’s that my company matches and had a good return last year but I have no idea how they were invested. It is a subject I would like to learn about but have no idea where to start. Is there a short list of books that you can recommend?

Gail Says: A lot of people think that The Intelligent Investor is the most important and influential book written about value investing. Originally published in 1934 by Ben Graham, this work has been heralded by such notable investors as Warren Buffett. Graham presents two types of investing styles – one for every day people who don’t want to think about their portfolios (“defensive”) and the business man or woman who wants to enjoy maximum returns (“enterprising”).

One up on Wall Street is a good second book for a new investor. Peter Lynch teaches you how to use what you already know to make money in the market.  

The Essays of Warren Buffett has been edited by Professor Lawrence Cunningham and is a great reference tool to have handy. Learn about management, business valuation, investing philosophy, the use of stock options, economic and accounting goodwill plus more.

The Bogleheads’ Guide to Investing is another good basic explanation of the different kinds of assets and how they work but skip the stuff on retirement accounts tax strategies because the rules are different in Canada.

There is a lot of information on the internet about investing. You can start with the stuff on my website and branch out from there. Go to the blog and look on the right side of the page for Categories. Go down to “investing” and you’re away to the races. Enjoy.

 

K Wrote: What is capital gain and should I take it now or later? I have owned a profitable rental property for approx. 3 years now. Other then the mortgage on my residence and on the rental property I do not have any debt. I have regularly paid into RSP’s for years as I have no pension plan and I save a little cash every pay.

Gail Says: A capital gain is the increase in value of capital. So if you buy a stock or a piece of property for $1,000 and sell it for $1,050, you’ll have a profit — or capital gain — of $50.

Typically you get a capital gain when you sell your investment, so you can’t just “take it.”

 

E Wrote: I’ve been approached a few times by friends and family who have gotten involved with direct selling. They’ve tried to recruit me into their “business opportunity” and I’ve listened to their “how much money I can make”, “how I can make my own hours”, etc. One of them is from Herbalife, and the other one is from Primerica. While I’m not really interested, they are VERY pushy. I’ve researched the companies a bit but it seems to me they succeed only if you recruit and recruit (as you need to have people under you). My question is; how do I tell them I am not interested? These are people that we love a lot — not family but they are part of a very close community at church. Although they have good intentions, I am not interested in their businesses but I don’t want “friction” to cause problems within the group. I already work hard and have little time for these types of endeavors. Not sure if you can get my drift on this question, but how do you think I should approach them

Gail says: Sure, I get it. Simply tell them that you are already fully committed time-wise doing the things you love, and that between those passions and your life as a dad and a husband you don’t have an iota of time left. You love their passion about what they do, as you’re sure they love yours about your life right now. It’s great they want to share with you, but you’ve just got your hands full, so thanks, maybe down the road sometime, but for the next couple of years you’re dance card is full.

 

A Wrote: I’m 31 years old, single and recently my consumer proposal has been accepted. Finding your books, TV show and blog has helped me look at my finances in a different view. As I can’t afford a financial advisor at this time and a newbie in investment, I was hoping you can guide me on next steps. I’m so overwhelmed by all the financial info out there and I know you said don’t invest in something you can’t explain to a child so I’m probably not looking at mutual funds or EFTs etc. I managed to save $5000, guess it’s my emergency fund/savings…since, I filed my proposal but it is sitting in a very low interest savings account. Feels like I should park it elsewhere. I have no TFSA at this time (did years ago but withdrew to pay down debt). I have about $7000 in RRSP’s and no other assets. What do you recommended for me to build up my retirement and emergency funds? I make about $36,000/year. I feel behind in my finances and saving for the future. I’m more of a low to moderate risk taker based on your book.

Gail Says: If you are a low to moderate risk taker, you need to limit your investments to those that will let you sleep at night. Keeping a healthy cash balance in an emergency fund is one step. Yes, the interest rates are low, but if you shop around you can get a slightly better rate than if you just default to what your bank may be offering.  

A TFSA is a great place to put money you want to set aside for an emergency fund and for your future. You can hold any investment in a TFSA that you can hold in an RRSP so feel free to build your cash for an emergency and take some of your money (lets say about 25% for now) and invest in a balanced mutual fund. You’ll get a little growth and a little fixed income, and build your risk tolerance as you build your asset base.

Don’t worry about being “behind.” It is most important that you start. As you become more comfortable building up your assets, you can learn about other options. If, down the road, you decide to take advantage of an RRSP to minimize your taxes, you can always use some of the money you’ve socked away in your TFSA to fund a contribution.