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(Dushan Milic For The Globe and Mail)
(Dushan Milic For The Globe and Mail)

PORTFOLIO MAKEOVER

Is volunteer’s portfolio as good as her deeds? Add to ...

Some retirees like the sun and sand of the U.S. sunbelt to ride out Canada’s frigid winters, but not Teresa. The 57-year-old retired public servant prefers the coast of West Africa.

Yet she isn’t vacationing. Instead, she sold her home in Winnipeg 18 months ago to volunteer overseas helping others for the next decade.

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“Sharing my time, talent and treasure is what makes me feel whole,” she says.

Teresa’s expenses today are about $1,040 a month, which is much less than the $2,501 net income she receives from her work pension.

“Of that, I give away about $300 per month to people in need, and there’s lots of need here,” she says, corresponding by e-mail from aboard a volunteer aid ship docked off the coast of Guinea.

Teresa says she has an investment portfolio “nearing $300,000” with TD Waterhouse, a unit of Toronto-Dominion Bank. She is a balanced investor who has 8 1/2 years for her money to grow, at which time she will be 65, plans to return to Canada and will need her investments to provide a steady flow of cash to supplement her work pension, Canada Pension Plan and Old Age Security incomes.

The portfolio is slightly oriented toward growth and contains four so-called “fund of funds” – mini-portfolios containing at least 10 mutual funds each. Most of the funds invest in high-quality government and corporate bonds and blue-chip stock.

“Based on what TD Waterhouse has put together, with my public-sector pension, my expectation is to have an income stream of $60,000 to $80,000 [a year] by age 65,” she says.

Still, Teresa says she isn’t a sophisticated investor and doesn’t know if the portfolio is right for her. “I wonder whether my investments are on track to reach my income goal?”

For advice on Teresa’s portfolio, we turned to two Winnipeg-based wealth managers – Uri Kraut, a financial planner and senior wealth manager with Assiniboine Credit Union, and financial planner and portfolio manager Doug Nelson with Nelson Financial Consultants.

The basics

$126,600 Non-registered accounts (TD Managed Income & Moderate Growth Portfolio, TD Target Return Balanced Fund).

$74,000 Registered retirement savings fund (TD Managed Balanced Growth Portfolio).

$16,700 Tax-free savings account ( TD FundSmart Managed Balanced Growth Portfolio) .

Uri Kraut’s tips

1. Teresa’s income goal expectations are not properly aligned with her investment strategy. First, her portfolio is less than she realizes. The total value is about $217,000, not $300,000. Based on a 4.75-per-cent return net of fees, her portfolio would be valued at about $314,000 in about eight years. If she is able to contribute $500 a month to her non-registered and TFSA while volunteering overseas, Teresa could increase her portfolio by about $63,000. Yet it’s unlikely her portfolio in eight years would be able to sustain even the low end of her goal – $60,000 gross a year – because she would need to withdraw $24,000 a year from her savings. At that rate, her money would last until her early 80s at best and less than 10 years in a worst-case scenario. Throwing around income goals with as wide a range as $60,000 to $80,000 a year and not knowing her portfolio’s value are likely indications she and her adviser are not on the same page – precisely why she needs to have a clear plan.

2. Teresa owns only funds managed by TD sold to her by a TD adviser, which begs the question whether she is being sold the best funds possible for her needs. Because the portfolio’s performance is, at best, average, the answer is likely no. The trailing returns for her overall portfolio over one year, five years and 10 years are all below the benchmark in large part because of the fees she pays for management. The management expense ratio (MER) for the entire portfolio is 2.46 per cent. Higher management costs are not necessarily a bad thing if the management actually outperforms its benchmark over time, but this isn’t the case. The high fees are even harder to justify when we take into consideration that half the portfolio is invested in bonds, making it difficult for her investments to produce a return net of fees and taxes that keeps ahead of inflation. For example, if her bond investments held in her non-registered account average 4 per cent a year, the net return after taxes and fees would be about 0.5 per cent. With an inflation rate of 2 per cent, the return is negative.

3. Teresa’s portfolio isn’t as diversified as it may appear. Although the “fund of funds” strategy claims to provide diversification by investing in many funds that are themselves diversified in many investments both geographically and by sector, the reality is this strategy has created a situation in which Teresa’s portfolio holds many funds that own the same investments with similar asset mixes. In other words, they are highly correlated to the same market risks. This is the opposite of diversification, which is intended to de-correlate assets in the portfolio so when some investments are affected by a downturn, others are less affected or, ideally, perform well. Teresa would likely be better off owning five to eight top-performing mutual funds as her entire portfolio. This strategy is more streamlined than the current structure of four mini-portfolios, each containing at least 10 mutual funds or exchange-traded funds. This smaller, more simplified portfolio provides a better understanding of whether her investments can yield the return necessary to meet realistic income needs down the road.

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