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(Kiyoshi Takahase Segundo)
(Kiyoshi Takahase Segundo)

Portfolio Strategy

A simple formula points to bargains Add to ...

There's a mathematical formula that much of the investment industry wants to keep secret: Market gains minus fees equals returns to investors.

The formula is so simple, and yet so subversive because it could cause you to question some of your investments and the dealers through which you buy them. Cost is not the only consideration in choosing what to invest in and where to buy it, but savvy investors know it's a big factor.

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Let's get you started thinking about costs by looking at some of the top investing bargains. You'll find these suggestions useful if you're making investment decisions for your registered retirement savings plan, and all year long.

Bargain No. 1: Low-cost mutual funds

A very small number of fund firms now offer a D-series of their lineup that is specifically targeted at do-it-yourself investors who neither receive nor want advice. The benefit of D-series funds is that their fees are not weighed down by trailing commissions, which are used by fund companies to pay advisers who sell their products.

Companies offering D funds include blue-chippers such as Phillips, Hager & North, Beutel Goodman and McLean Budden, all of which have some very competitive funds in their lineups. Royal Bank of Canada's huge mutual fund arm has a D series that strips out most but not all trailing commissions. D-series funds are also suitable for use in fee-based advisory accounts. Note: Mawer and Leith Wheeler are two other firms that sell funds ideal for DIY investors.

Bargain No. 2: Three bond funds

The first bond fund bargain offers a defensive way to get some exposure to the bond market at a time when interest rates are expected to rise and put downward pressure on bond prices. It's the Claymore 1-5 Year Laddered Government Bond ETF , which has a management expense ratio of just 0.16 per cent. This is a very strong alternative for the average small investor to building a ladder of one- through five-year government bonds.

If you prefer mutual funds to exchange-traded funds or don't have a brokerage account needed to access ETFs, then consider two funds that combine very low costs with top returns over virtually all time frames. One is Phillips, Hager & North Bond and the other is Beutel Goodman Income (note: we're talking about the D-series for each). The people running these funds flat out know what they're doing, and the returns they generate are eroded by far lower fees than almost all competitors charge.

Bargain No. 3: A balanced fund

All you need for a fully diversified RRSP portfolio is in Mawer Canadian Balanced RSP, which is made up of seven domestic and global stock and bond funds in the high-quality Mawer family.

At 0.98 per cent, the management expense ratio is less than half the average 2.11 per cent for the five largest funds in the global neutral balanced category. You could own an ETF portfolio for roughly half of what this Mawer fund charges, but you'd have the cost of buying and rebalancing your ETFs. Mawer does it all for you in way that generated average annual returns of 8.3 per cent over the past 20 years.

Bargain No. 4: Another balanced fund

CI Signature High Income's management expense ratio of 1.58 per cent sounds high by the standard of the funds mentioned above. But it's actually quite a bargain because it includes compensation for investment advisers, whereas the previously mentioned funds do not.

Beyond the fee, what distinguishes this fund is a long record of returns that are consistently above average in the global neutral balanced category along with volatility that is well below average.

Bargain No. 5: Low-cost ETFs

Exchange-traded funds rule for low-cost investing, and Vanguard ETFs are consistently among the cheapest available. That's why Vanguard's funds are starting to take market share away from more established companies in the ETF world.

Vanguard ETFs are listed on the New York Stock Exchange, which means your broker will charge you foreign exchange fees to buy them. You'll have the offsetting benefit of paying ongoing ownership fees that are outrageously low. The Vanguard Total Stock Market ETF has a fee of 0.07 per cent and gives you exposure to both large and small companies in a single package. That's $7 (U.S.) in fees per $10,000 in invested.

Bargain No. 6: More low-cost ETFs

Listen up if you're avoiding ETFs because you invest regularly and don't want to continually pay brokerage commissions. Using the pre-authorized cash contribution plan offered by Claymore Investments through a variety of brokerage firms, you can make repeated purchases of Claymore ETFs at no cost once you've bought your initial position.

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