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Dale Jackson

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Investing a windfall wisely

Dale Jackson

Uncle Horace seemed like a man of diverse disposition, so any investment portfolio he inspires should reflect that trait. $25,000 spread out over several risk levels can be expected to produce a safe 10 per cent return after one year — especially if management fees are kept in check. Prices quoted are from the close of trading on October 3, 2006.

To anchor risk, 10 per cent of the total inheritance, or $2,500, will go into a single low-risk, boring bond. A government of Prince Edward Island bond with a coupon rate of 6 per cent comes due October 3, 2007. All things being equal, and taking into account a small capital loss off the purchase price, that $2,500 will yield 5.9 per cent and become $2,648.

Next on the risk ladder comes a basket of five income trusts to provide income and growth. Twenty per cent, or $5,000 is dividend equally among two real estate investment trusts (REITs) and three income trusts.

Retirement Residences REIT (RRR.UN TSX) — Provides retirement and long-term care housing for growing seniors market. It stands to reason that the demand for senior care will grow as more and more baby-boomers reach retirement age. Unit price: $7.82. RioCan REIT (REI.UN TSX) — A diversified portfolio of retail properties across Canada — long live strip mall mania. Unit price: $24.11 Canadian Oil Sands (COS.UN) — Oil sands production is expected to grow even if the price of crude trades below its highs. Unit price: $27.18 Sterling Shoes (SSI.UN TSX) — You gotta wear shoes. Unit price: $15.72 Northwest Company Fund (NWF.UN) — Provides consumer essentials to remote northern communities. Global warming and demand for metals and minerals will continue to open up the north. Unit price: $17.16

Blue-chip stocks come in roughly in the middle of the risk mix. They trade in high volume, so volatility risk is limited. At the same time they have plenty of room to grow and often pay dividends. $5,000 or 20 per cent of the portfolio will be committed to blue-chips, but which blue-chips?

The biggest equity market is in the United States. Blue-chip stocks from around the world trade in the U.S. — making it a global equity market. Generally, old-economy stocks trade on the Dow Jones Industrial Average, and new economy — technology stocks — trade on the Nasdaq. A benchmark index that includes a good mix of the biggest and best of both is the S&P 500. It is possible to invest in all 500 stocks listed according to weighting by purchasing an S&P 500 exchange traded fund (ETF). $4,000 will go into the Barclay's sponsored iShares S&P 500 ETF — unit price: $133.55 (U.S.).

Some Canadian blue-chips are inter-listed on the S&P 500 but one essential class of stocks deserves an extra weighting. Canadian banks are the envy of the world and the saviour of many retail investment portfolios over the volatile markets of the past 10 years. There are five major banks in Canada but two stand out for their diversity and growth potential, and $500 (Canadian) will be invested in each. The first, Bank of Nova Scotia (BNS TSX) traded at $48.40 at the market close on October 3, 2006. The second, TD Bank (TD TSX), traded at $67.04.

The portfolio is left with an obvious gap: the rest of the world. It's not easy to find good stocks outside North America so an international equity fund would be the best place for $5,000 or 20 per cent. Mawer World Investment requires a minimum $5,000, has a very reasonable MER of 1.46 per cent (no load), and has managed to consistently outperform its peers and the benchmark MSCI EAFE Index. Holdings are spread out across several sectors and geographic regions with the bulk of assets in Europe. Unit price: $34.44.

It may be a warning from the ghost of Uncle Horace, but there seems to be a chill running through this portfolio. All the holdings so far will only succeed in a stable, expanding economy. A hedge fund could temper losses in the event of an economic or market disaster. $2,500 or 10 per cent is set aside for a hedge fund but options are limited since initial investment minimums in that asset class are generally high. The Friedberg Futures U.S. fund requires a minimum $2,000 to enter and it has returned an impressive 46 per cent so far this year through speculative trading in commodity and currency futures. It's a no-load fund with a performance-based MER of 4.81 per cent. Unit price: $16.80 (U.S.).

With that out of the way it's time for a little fun. The remaining 20 per cent or $5,000 (Canadian) is invested equally in two higher-risk, lower-volume stocks. In cases like these it's best to go where the experts are going and there are a couple experts worth following.

Emergis (EME TSX) supplies software solutions to the financial services and health care industries. Its one of the top picks by Bob McWhirter, president of Selective Asset Management on ROBTV's Market Call. Share price: $5.39. Clean Harbors Inc. (CLHB Nasdaq) provides a wide variety of environmental services. It's also one of the top holdings in the RBC O'Shaughnessy U.S. Growth fund — the top performing U.S. small and mid cap growth fund this year. Share price: $43.05.

If all goes well that $25,000 will become at least $27,500. See you next year.

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

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