Your Complete Guide to Index Investing with Dan Bortolotti

A Mutual Fund Refugee

2018-06-16T10:13:36+00:00March 19th, 2010|Categories: Indexing Basics|15 Comments

I hear from a lot of investors who are mutual fund refugees: they’ve abandoned their overpriced, inappropriate funds and the advisor who sold them, and they’re trying to move ahead on their own. Darren, a reader in British Columbia, recently wrote to me with his story and gave me permission to share it.

Darren and his wife, Sarah, are in their 60s and have been retired for seven years. Until last year, most of their RRSP savings were in mutual funds handled by a adviser they thought was trustworthy. Only after the markets plunged in 2008–09 did they fully understand their situation: the adviser had all of their savings in equities. Not only did they lose a huge chunk of their nest egg, but when they went to sell their funds in disgust they faced the added insult of deferred sales charges. “After that episode we have become rather jaded with financial advisors,” Darren says.

A year later, he and Sarah are still sitting on $283,000 in cash, plus $57,000 in stocks from Darren’s former employer, a telecom, which he does not want to sell. They’re ready to get back into the market and want to build an ETF portfolio they can manage themselves. Unlike their adviser, they understand that 100% in stocks is too risky for retirees. “We want a portfolio focused on preserving principal, while at the same time providing a fair level of growth and income,” Darren says. “We don’t plan on dipping into any investments for at least two years.” They feel comfortable with 40% in bonds, 20% in cash, and 40% split between stocks, preferred shares, REITs and gold.

The problem is that the couple’s cash is spread between several accounts: two RRSPs and a taxable account. They also have two Tax-Free Savings Accounts they’re using to hold some of the telecom stocks.

When Darren first contacted me, he wasn’t sure whether he should treat all of the accounts as a single portfolio, or whether he should make sure each account included 40% bonds and 20% cash. I explained that since all of their money will be used for the same purpose, they can think of it as one big portfolio: as long as the overall allocation is on target, the asset mix in any one account doesn’t much matter. However, he should strive to keep transaction costs and taxes to a minimum. Ideally, none of the ETFs should be duplicated, and most importantly, he should pay careful attention to his asset location. That means putting all the bonds, cash, REITs and foreign stocks in registered accounts, while using the taxable account for Canadian stocks and preferred shares to take advantage of the dividend tax credit. (Since gold pays no distributions, it’s also fine in a taxable account.)

So Darren sat down with a spreadsheet and came up with this portfolio:

RRSP 1
Claymore 1-5 Year Laddered Government Bond (CLF) 20,000 6%
Claymore 1-5 Year Laddered Corporate Bond (CBO) 20,000 6%
iShares Real-Return Bond (XRB) 48,000 14%
iShares Canadian REIT (XRE) 10,000 3%
Laddered GICs 10,000 3%
Cash 7,000 2%
RRSP 2
iShares Canadian Long Bond (XLB) 40,000 12%
iShares US High-Yield Bond (XHY) 7,500 2%
Laddered GICs 7,500 2%
Cash 5,000 1%
TFSAs
Telecom stocks 20,000 6%
Unregistered
Telecom stocks 37,000 11%
Vanguard Total World Stock Market (VT) 17,000 5%
Vanguard Total Stock Market (VTI) 7,500 2%
Claymore S&P/TSX Canadian Dividend (CDZ) 14,000 4%
Claymore S&P/TSX Canadian Preferred Share (CPD) 14,000 4%
Claymore Gold Bullion (CGL) 17,000 5%
GICs 33,500 10%
Cash 5,000 1%
 340,000

“We’re asking for some critical feedback on our plan,” Darren writes. “Please don’t be shy as we’re learning a lot here.” Readers are welcome post their comments below.

Thanks for sharing your experience, Darren, and good luck with your investing!