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Mentor Program

Week 3: Intermediate investor discussion Add to ...

Our intermediate investor, Rob, is now in the third week of our unique investment mentoring program. He's learned all about asset allocation. Now, his mentor, Warren MacKenzie, helps him define a core investing strategy using ETFs.

ETFs are an inexpensive way to diversify your portfolio and earn the market return. Below is an online discussion from Tuesday about how to build a strong portfolio using exchange-traded funds.

How to use ETFs to build a strong portfolio

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

The winner of our intermediate category, who can be identified only as Rob from St. John's, and Warren MacKenzie have had two online discussions on sharpening Rob's investment strategy. You can review them 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.

The third week's discussion is below. The next discussion will be on Thursday at noon, ET. You can get a jump on the queue by submitting your question here.

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: Hello, everyone, thanks for joining us. We've got lots to talk about today, so let's get right to it. Let's start with some reader questions this time.

Robert Hurdman writes: Over the last six months, ETFs have not performed any better than mutual funds. Further, asset allocation hasn't helped even the Ivy League endowment funds, since everything went down.

How does that affect your investment approach? Should a person invest the same way today (eg. 40% Cdn stock, 20% US stock, 20% Cdn gvm't bonds) as they were six months ago? Twelve months ago? Five years ago?

Why do you recommend ignoring the companies that you own and using an ETF to own them all? Aren't there well-run companies that you would prefer to own, and poorly managed companies you would prefer to avoid?

Warren MacKenzie: There is a long term view and a short term tactical view. Unless things change for the individual, there is no reason to change the long-term asset allocation. If you believe that equities are going to outperform other asset classes over the next year, you would overweight them relative to your long-term asset allocation. If you believe the opposite you would underweight equities.

On Q 2.: Are there not some well run companies that you would like to own - instead of an ETF?

A. The quality of a company often has very little to do with its price performance in the future. It is easy to differentiate between good quality companies and poor quality companies but it is more difficult to use this information to predict the future price. Microsoft, General Electric and Cisco were all excellent companies in 2000, they are still excellent companies today - but their stocks prices are considerably lower today.

Daniel de Young writes from St. Marys, Ontario: I would like to have a substantial international (outside of US/Canada) allocation with my ETF's to be better diversified. However, due to the different withholding tax treatment of international dividends, I have made the allocation smaller than I would like at 20% of my all-equity portfolio.

Do you think the effect of withholding taxes is significant enough that it should affect my portfolio allocation, and what do you think a good allocation for international stocks is for a Canadian investor?

Warren: Withholding tax is a small consideration compared to the real risk of currency fluctuations. We would suggest that you should have approximately 50% Canadian and 50% not Canadian equities.

Tony Lee writes: What are the differences between ETF providers (are some "better" than others)? If there are comparable ETFs from say, iShares and Claymore, what should my considerations be?

Warren: In most cases the main difference between ETF providers is that different providers have licenses for different indexes. For example Claymore has a completely different line up of indexes than does iShares.

You should find the ETF which is most appropriate for your needs, and don't be concerned about the provider.

Paul Lear writes: Can you explain how US taxes/withholding work for US$ funds? Can it be avoided with certain brokers?

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