Personal finance writer Gail Bebee and the winner of our investing quiz, whom we can identify only as Steve, are into their fourth, and final, week of mentoring.
In this final instalment of the new investor mentoring series, we'll walk through the steps our iTrade contest winner Steve took to arrive at his decision on where to invest his $10,000 prize money. I've noted significant aspects of our mentoring discussions to give readers a feeling for some of the thinking that contributed to his conclusions.
After reviewing his personal financial situation, Steve decided to set up a family emergency fund using $4,000 of his prize money and earmark the remainder for home renovations he is planning in three to five years. The two risk questionnaires he completed indicated that a 50-50 mix of lower and higher risk investments would suit his appetite for risk. He realized that while he is interested in investing, he doesn't have much time to devote to managing his investments given his family responsibilities-he's the proud dad of a two-year-old daughter-and a busy job that involves frequent travel.
Steve and I discussed a number of specific investments that might fit his investor profile and achieve his financial goals.
Because an emergency fund by definition must be readily available to deal with life's unexpected events, the $4,000 allocated for emergencies should be invested in low risk, liquid assets. The iTrade Cash Optimizer Account, a high-interest savings account where his prize money currently resides, meets this requirement. Because this account earns only 0.75 per cent interest, we looked at other fixed income investments that might offer better returns. Bond mutual funds offer a higher return, but can be volatile and are not guaranteed. A cashable GIC is another safe, fairly liquid option.
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I called the iTrade trading desk to obtain a quote and was told that a one-year GIC cashable after 30 days currently pays just 0.46 per cent. We concluded that the Cash Optimizer Account is the best place for the emergency fund cash.
Given Steve's busy schedule, goals, risk profile and the amount of money he has available, we agreed that a balanced mutual fund or exchange-traded fund (ETF) would be the best choice for the $6,000 home renovation fund. With one purchase, he can achieve instant diversification and own an investment, which requires minimal ongoing monitoring.
Using the fund filter feature at globefund.com, we walked through a search for Globefund 5-star rated funds in the Canadian and global neutral balanced categories (funds in these categories hold 40-60 per cent equities). Mindful of the impact of management fees on returns, our criteria also included a Management Expense Ratio (MER) of 1.5 per cent or less.
The Claymore Balanced Income CorePortfolio™ ETF , a fund of exchange-traded funds, was one of the few funds in the search results, which has a feasible minimum investment and is available to discount brokerage clients. Besides five-star performance, the fund carries a reasonable management expense ratio of about 0.70 per cent (this includes the underlying fund fees).
The fund mandate to provide an income stream and the potential for capital appreciation fits with Steve's goals. This ETF comes with a valuable bonus that is not available for all ETFs, a dividend purchase plan (DPP) option. With a DPP, additional full shares are automatically purchased with any cash dividends paid by the fund, so profits quickly get to work earning more profits. With $6000, we estimated that Steve could buy 330 shares at the current fund price of about $17.75-$18.00 and a commission of $19.99.
With his investment decisions made, Steve can log into his iTrade account, go to the trading page and purchase 330 shares of the Claymore Balanced Income CorePortfolio™ ETF. The final step in executing his chosen investment plan is to call the iTrade trading desk and request the DPP option for this fund.
Reflecting on the investor mentoring experience, Steve feels he still has much to learn about the world of investing. He has decided to commit a block of time each week over the next several months to reading books from the book lists mentioned in and becoming a more knowledgeable investor. Meanwhile, as he goes about his busy life, he has cash available for emergencies -- and the investments he has purchased with his prize money are earning a steady profit.
Gail Bebee is the author of No Hype - The Straight Goods on Investing Your Money. She can be reached at email@example.com; her website is gailbebee.com