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Dale Jackson

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Weeding the garden

Dale Jackson


TORONTO (GlobeinvestorGOLD) — Any good gardener knows you have to keep on top of the weeds and consistently trim dead leaves and branches if you want to produce a decent yield. If you let it go too long the good growth will be choked by the bad stuff. It's the same with your retirement portfolio, which may have somehow gotten out of control and now needs some serious pruning.

The first step is to find out what you have — good and bad. Many of us began contributing to our Registered Retirement Savings Plans (RRSP) before we had a retirement savings plan. Perhaps we were in our early twenties and the contribution deadline was approaching, so we went down to our local bank branch and got whatever they recommended.

As the years went by we may have joined company pension plans or made other last minute RRSP contributions, and now we're left with a mountain of financial statements.

The trick is to transfer them to as few managers as possible and consider them to be part of one portfolio — yours. Once you've done that you may be shocked to learn how many stocks, bonds and mutual funds you have. One common question asked by viewers who call or e-mail Report on Business Television's "The Mutual Fund Show" centres around how many funds should be in a single portfolio. One individual who wrote in had 26 mutual funds. That's too many. Three mutual fund experts offer their advice on determining how many mutual funds are enough and how to identify and trim the dead wood.

Ranga Chand, president of Chand Carmichael & Company says the average investor owns too many funds. "From what I've seen, many people overdose on mutual funds," he says. Depending on the individual's circumstance and the size of the portfolio a good overall portfolio can have as few as three and as many as eight. "It's essential to have a Canadian equity fund, a global equity fund and a bond fund" he says. After that investors can diversify with small cap funds, emerging market funds, income funds, or high yield funds.

Ian Filderman, director of mutual funds with ScotiaMcLeod says a small retirement portfolio could be diversified enough with a single fund that covers all the asset classes. A good balanced fund will hold Canadian and global equities, as well as a fixed income component. A good balanced fund manager will keep to the 30 per cent foreign content limit to allow the fund to be RRSP eligible, and the total fixed-income weighting will usually loom at about 40 per cent of the overall assets to help preserve capital gains.

In the real world, Ian Filderman recommends four to nine mutual funds in a portfolio, based on studies that have pegged the average assets in a retirement portfolio at between $30,000 and $50,000. He says the number of funds should increase with the size of the portfolio.

Mr. Filderman has a few tips for the folks with too many mutual funds: "start with the fund families." He says investors should categorize funds into their intended fund families. Mutual fund companies normally offer groups of funds designed to cover all the asset classes and compliment each other when it comes to overall portfolio growth. From there he suggests weeding out funds outside the family that duplicate the funds within the family. As an example, an investor may have more than one Canadian equity fund with similar objectives, investment style and returns.

He has one warning to investors who may be too aggressive in trimming down their portfolios: "avoid unnecessary deferred sales charges." In other words make sure you find out what, if any, fees are attached to funds that are sold before a certain holding period. Fund companies impose back-end loads to discourage investors from dumping them. Pruning a portfolio is not to be done overnight. It may take a few years to avoid fees and find the right moment to sell those duplicate funds.

Levi Folk, president & managing editor of Fundlibrary.com says the average self-directed RRSP should have between five and ten funds, but he says that number could go higher when you factor in self-directed company pension plans. He says it's better to err on the side of too many funds than risk under-diversification. "You're bound to have some overlap because the Canadian market is so small," he says.

He also cautions investors not to assume two funds are the same just because they're in the same fund category. He says two Canadian equity funds could have very different investment styles, and the differences widen when it comes to foreign funds. "Read the prospectus," he says, suggesting investors search out clues as to how the fund managers manage. He also suggests comparing betas, which measure the fund's volatility or risk level.

Fixed income is often the overlooked asset class. As a rule-of-thumb, financial advisers recommend the percentage fixed income weighting of a portfolio should be equal to the investor's age. That means if you're fifty years old, half of your portfolio should be in fixed income. As you age, your fixed income weighting increases and the risk level of your overall portfolio drops. If you feel your fixed income weighting is too low, increase your stake as you sell off duplicate or unwanted equity funds. If it's too high begin investing in equities as your bonds mature.

There's some debate as to whether a bond fund should be considered fixed income because bond fund managers trade their holdings before maturity to seek capital gains. A pure fixed income component consists of bonds and other interest-generating securities, which are held to maturity. The best strategy for maximizing fixed income returns is to ladder bonds so they mature at regular intervals. That way the fixed income investor can expose their holdings to several interest rate environments.

It's also good to have some of your holdings in cash to take advantage of limited opportunities that may arise. The amount is up to the individual investor but its best to keep the cash component under 10 per cent.

One final note in pruning your portfolio: if it is within an RRSP, be sure your foreign holdings do not exceed 30 per cent or you could face penalties from the Canadian Revenue Agency.

There is no cure-all method for pruning your portfolio — it's more a question of balance. It's good to be diversified but too much diversification can choke the life out of your retirement savings. It's important to work with an independent financial planner — preferably one with some gardening experience.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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