"If you watch the pennies.....” is not, actually, the whole story. Sometimes those resulting dollars can take on a life of their own, and need minding in a whole new way.

After decades of carefully saving her pennies, Joan Shebaylo discovered that her dollars had grown up very nicely indeed. But she was still treating them like small change, carefully tending each one as a special asset, while the dollars were slipping away, either as too-large management fees or too-small net returns. They weren’t working hard enough for her financial future.

Like many a conscientious and careful investor, Ms. Shebaylo, a Toronto dental hygienist in her 50s with a grown daughter and an income in the mid-five figures, had carefully salted away her annual RRSP contribution into a wide array of mutual funds, balanced funds, bank accounts and additional savings that she maintained between a major bank and a brokerage firm.

By investing in a wide assortment of financial packages, she thought — as many people do — that she was minimizing her risks and benefiting from many different asset types in her portfolio, which registers in the mid-six figures. But by focusing on each investment separately, she lost sight of her overall asset mix and her management fees. Her portfolio became over-weighted in Canadian equities, for example, and missed the risk-balancing opportunities of international equities. She was paying lots of “small investor” fees on a range of funds instead of consolidating them into the larger and less-expensive managed groups she could now afford. It was time to call the whole portfolio to account.

When financial consultant Warren Baldwin, vice president of T..E. Wealth in Toronto, and his associate, Kathryn Jankowski, analyzed Ms. Shebaylo’s portfolio, they quickly homed in on the total costs in fees and management expense ratios that her money was costing her each year. Seventy per cent of her portfolio was in actively managed money, via mutual funds.

The average cost of her mutual fund portfolio has a management expense ratio (MER) of 1.7 per cent, which seems acceptable. But when Mr. Baldwin’s analysis stripped out one extremely large holding of her monthly income fund, the MER average on the remaining funds jumped to 2.2 per cent, or nearly $3,000 a year. Her mutual funds, furthermore, are mostly balanced funds, a blend of equities — which can require active management — and bonds and other fixed interest-bearing instruments that can be managed for lower costs in a specialized fund of their own.

By keeping large amounts of her portfolio in a selection of balanced funds, Ms. Shebaylo was effectively paying a high management cost on her fixed-income investments. For example, Mr. Baldwin pointed out, given that bonds are generally running in the 4-per-cent return range, even with her monthly income fund’s low MER of 1.43 per cent, she is paying 35 per cent of that bond return to manage that fund.

And at a MER of 2.2 per cent for the other funds, she is giving back about half of her other fixed-income revenues. Because these fixed-income assets constitute 22 per cent of her total portfolio, they are costing her $2,600 in annual fees, an expense that could easily be reduced by consolidating the fixed-income portion of her total investments into a single, low-MER portfolio structure.

Furthermore, a large portion of her fixed-income holdings was outside her RRSP and was thus taxable — another drain on her revenues. Mr. Baldwin recommended shifting all of her fixed-income holdings into her RRSP to maximize her long-term returns.

Ms. Shebaylo also likes getting the monthly statements from her bank and brokerage that showed a bit of income added each month from her investments. She hadn’t been spending or reinvesting that income, just letting it add up into a nice number of its own. Because she also has a savings account with sufficient cash to cover emergencies and short-term needs, Mr. Baldwin recommended shifting that monthly income into a reinvestment plan, so those dollars could begin accumulating growth of their own.

Ms. Shebaylo usually waits until RRSP season each spring to make her annual contribution for the previous year. But because she is both a salaried employee of one firm and a contract employee elsewhere, Mr. Baldwin pointed out that she would normally know from her accountant how much she could contribute very early in each tax year. With her carefully saved and adequate bank account, there is no need for her to wait until the following spring to put that RRSP contribution to work. She could do her 2007 contribution now as well, he noted.

Ms. Shebaylo’s one-year-at-a-time approach to choosing mutual funds had resulted in a collection of more than 25 funds, none of which was larger than 2 per cent of her portfolio. That means that none of these funds’ performance could have any real impact on her overall results, Mr. Baldwin pointed out, and also complicated the monitoring of her overall asset mix.

“The disconnect here,” he said, “is that while 70 per cent of the assets are in managed funds, nearly 30 per cent of the portfolio is scattered in holdings that, in the long run, detract from Joan’s ability to manage her asset mix.” Mr. Baldwin’s analysis of the total equity mix in her mutual-fund collection showed that she had too much invested in Canadian stocks, and in those, she was heavily over-weighted in the energy sector, making her portfolio more vulnerable to changing energy prices or the impact of alternative energy sources. She needed more exposure to U.S. stocks to be able to hold prudent investments in pharmaceutical, technology, automotive, major retail and other sectors that aren’t well-represented in Canada. He felt she also needed to increase her international exposure in European and developing markets, to open up long-range opportunities and to dampen the impact of any major changes in the Canadian dollar.

Because Ms. Shebaylo hopes to retire in 10 years, Mr. Baldwin’s recommended asset mix would be to increase her fixed-income holdings to 40 per cent (from the current 20 per cent), held inside her RRSP in a single low-MER, fixed-income fund. She should also reduce her Canadian equity holdings to 20 per cent, from the current 59 per cent, and shift the balance into 19 per cent U.S. equities and 21 per cent foreign equity.

Mr. Baldwin also noted that, on the personal financial planning side, it was time for Ms. Shebaylo to update her will, and, because she is in a fairly physically demanding profession, should use the $700 a year she currently pays for life insurance to pay for disability or critical illness insurance instead.

“With Joan’s aggressive savings capacity — and if she gets decent returns over the next three to 10 years — her portfolio could very well double by the time she retires. She’ll be well set up to leave something to her heirs if she chooses,” he said.

“But if she’s forced to stop working or cut back before she’s ready to retire, it makes sense for her to have some insurance protection for herself.”

Special to The Globe and Mail