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Mentor program

Week 2: Intermediate investor discussion Add to ...

If you enjoy investing and are wondering how to get better at it, follow our one-month mentor program for intermediate investors. We're into the second week of discussions on how to take your investing savvy to the next level.

Weeks ago, we ran an investing contest. The winners were classified in to three categories: advanced, intermediate and beginner.

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Last week, the winner of our intermediate category, who can be identified only as Rob from St. John's, sat down with his mentor, Warren MacKenzie for a quick chat, followed by a live, public, online discussion. You can review it here:

Warren MacKenzie is the founder of He is a CA, CFP and CIMA (Certified Investment Management Analyst), the author of The Unbiased Advisor and co-author of New Rules for Retirement.

When you're finished reading week three's discussion below, you can move on to week three:

Editor's Note : globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Sonali Verma, Globe Investor: Greetings, everyone, thanks for joining us. Looks like Rob has had a busy week, with a mountain of reading that Warren has asked him to do :-)

So Rob, tell us what you've learned over the past week -- the good, the bad, the ugly. Any surprises?

Rob: My wife and I have spent the majority of the week defining exactly what we want out of our investments. We've realized that we are closer to retirement than we thought. So our focus has shifted to what sort of mix we need for a comfortable retirement. The books Warren sent us were very helpful.

Our major surprise was in attempting to find a local investment advisor. The first question which he asked was not how he could help us, but how much we had to invest.

Sonali: Warren, what would you suggest now? Where does Rob go from here?

Warren: Rob - notwithstanding that your first contact blew you off - you should speak to the managers of two brokerage firms and ask each for the name of an advisors who will give you a written proposal for investing your capital. Then you should compare the cost and investment strategy for these proposals with what you could do yourself by using a 'couch potato' portfolio.

Sonali: Couch potato portfolio? Tell us more.

Warren: A couch potato portfolio is simply a portfolio containing a few broad based ETFs representing the major asset classes in a portfolio. As an example you would have an ETF for Cdn Bonds, Cdn Equities, U.S. Equities and Global Equities. The weights in each asset class would be dependent on the individual. Once a year you would rebalance the portfolio back to the long term asset mix.

A portfolio managed that way would provide good performance over the long run, but take minimal amount of time and effort, hence "couch potato."

Sonali: I see from your mentoring plan that you wanted to discuss the Core and Explore approach to investing. Would you like to tell us a bit more about this, and how they fit Rob's profile?

Warren: A core and explore approach or core/satellite is an approach where an investor will have broad market ETFs as the "core" of an investment portfolio surrounded by smaller positions representing specific strategies or individual stocks or securities. The "core" provides for the broad diversification and the "explore" allows for further customization to either reduce risk or to try to outperform. This discusses some of advantages of using this approach.

Sonali: Here's a reader question for you.

Novarro de Quadros writes: Buying & Holding Blue Chip Canadian stocks that are consistent in paying dividends - is this a recommended, long term investment? How does one identify these stocks?

Warren: Buying blue chip dividend paying stocks is good strategy for the equity portion of your portfolio. An easy way of buying them is to buy the iShares Cdn Dividend Index Fund You can go to to find information on that ETF.

Rob: What is a good asset mix for a person considering retirement in 15 years?

Warren: To a large degree it depends on the individual, their assets, their income and psychological tolerance and financial capacity for risk. A simple rule of thumb is the % of portfolio in equities is equal to 100 minus the age. So someone aged 50 that would be 50% equities and 50% fixed income. I believe that for many at the age of 50 equities should be somewhere between 50% and 70% of the total portfolio.

Rob: What are the advantages of a E.T.F over a mutual fund?

Warren: The main advantage is cost. An average Canadian equity mutual fund might have an MER of 2.5% versus only 0.17% for the iShares S&P/TSX 60 Index .

On $100,000 that translates into cost of $2,500 per year for mutual funds versus $170 for the XIU ETF.

Rob: Why is it a good idea to open a 'spending account' when considering your expenditures at retirement?

Warren: In retirement, it becomes very important to understand how much you spend. An easy way of doing it is to have a separate account for "spending" and separate accounts where the money coming in accumulates and is saved and invested. That way you can easily keep track of spending.

Josepf F. Konecny writes: Do you think there will be a pull back starting today?

Warren: Bull markets never go up in a straight line. I think we've probably seen the market bottom. The markets could pull back and it might have even started yesterday.

The question you have to ask is how much it will pull back. I do not know that answer. However if the market bottom was in March then we are only two months removed from the bottom.

Take a look at long term charts 20 to 50 years or longer of the TSX or S&P500. Look back at the past market bottoms. Would it be a good time to buy if you bought within two months of each market bottom?

John MacDonald writes: I'm a novice investor who has a business degree so I know a bit more than the average person. I'm just starting out in my career. My question is with regards to RRSP's and the relatively new Tax Free Savings Accounts offered right now.

I have a good government job and if I continue along with it, I will have a good pension come retirement. So my question is which would be better, putting $100 a pay in a RRSP of mutual funds or in a Tax Free Savings Account in the same mutual fund.

I like the idea that I can build up a large nest egg for retirement and any interest that it gives me will be tax free, plus if life throws me a curve ball I can take money out of the Tax Free Savings Account without any penalty.

Warren: Just a couple of points. Since you are early in your career, chances are you will have several employers over the course of your career and many probably will not have defined benefit pension plans. You might not have much room to contribute to an RRSP anyway because of your contributions to your pension plan.

I would open up a tax free savings account even if you cannot contribute much to it. The contribution room would continue to grow and if you came into a windfall later it could be put into the tax free saving account at that time. If you have no room for your RRSP, contribute to the tax free savings account.

If you have room to contribute to an RRSP do so. You will get the tax deduction and you can then use the funds for buying your first home and or if you go back to school as well as savings for your RRSP.

Here is that we wrote on achieving financial security if you are under 30.

Sonali: Many thanks for all your time and for joining us!

Rob: My thanks to Warren for his advice and books this week. It's all been helpful. I look forward to next week.

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