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A Royal Bank of Canada (RBC) logo is seen on Bay Street in the heart of the financial district in Toronto, January 22, 2015. (MARK BLINCH/REUTERS)
A Royal Bank of Canada (RBC) logo is seen on Bay Street in the heart of the financial district in Toronto, January 22, 2015. (MARK BLINCH/REUTERS)

INVESTOR CLINIC

Diversify your portfolio now, avoid regret later Add to ...

I have 850 shares of the Big Five banks in my registered retirement savings plan and my goal is to get to 1,000 shares – 200 of each bank – and then stop acquiring banks and use them as a source of income to buy other dividend stocks. My RRSP is currently worth about $150,000 and has several other stocks including BCE, Algonquin Power & Utilities, Suncor and TransCanada. Is this a bad idea going forward?

In a recent column, I quoted a portfolio manager who suggested that, for proper diversification, investors should allocate no more than 20 per cent of their equity portfolio to banks. Based on the information you have provided, it appears that about half of your portfolio is devoted to bank stocks. So your bank exposure is roughly 2 1/2 times higher than it should be, at least according to this rule of thumb.

Granted, you are planning to buy other stocks with your bank dividends. However, unless you also plan to add new money to your RRSP, the $6,000 or so of dividend income that your RRSP generates annually (assuming a 4-per-cent dividend yield on your $150,000 portfolio) won’t move the needle much on your bank exposure. As a result, you could remain overexposed to banks for years, which would leave you vulnerable should the sector run into trouble from a housing bust or some other crisis.

I would also point out that buying 200 shares of each bank won’t give you equal exposure to the Big Five. For example, based on current market prices, 200 shares of Canadian Imperial Bank of Commerce (the bank with the highest share price) is worth about 63 per cent more than 200 shares of Toronto-Dominion Bank (the bank with the lowest share price). So your 1,000-share bank portfolio would have significantly more exposure to CIBC than to TD. Remember, it’s the dollars invested that matter, not the number of shares.

I applaud you for coming up with a plan to guide your investing decisions. Most people don’t do that. However, I can’t see a compelling reason that you should acquire 200 shares of each bank before you begin to properly diversify your portfolio. You can diversify right now by allocating more of your capital to other sectors. What’s more, because your banks are held in an RRSP there will be no tax consequences if you decide to sell some shares.

I have a self-directed brokerage account with well over $100,000 in stocks and I’m concerned about my exposure. Should I open a second account at a different brokerage and transfer, say, half of my equities there so I am covered by Canada Deposit Insurance Corp. for both accounts?

First, let’s clear up some confusion.

Canada Deposit Insurance Corp. does not cover stocks or other securities. It insures deposits such as chequing accounts, savings accounts and guaranteed investment certificates for up to $100,000 per depositor per insured category in the event that a CDIC member financial institution fails. CDIC members include banks, trust companies and federally regulated credit unions.

For people with large sums of money, it can sometimes be prudent to spread deposits across two or more financial institutions to avoid exceeding CDIC’s $100,000 coverage limit (see today’ Portfolio Strategy column; more information is available at cdic.ca).

When you own stocks, bonds or investment funds, however, you are assuming the risk that they could fall in value – or in extreme cases even go to zero. That’s part of investing.

However, in the event that the brokerage holding your securities becomes insolvent, you would not be hung out to dry. The Canadian Investor Protection Fund (CIPF) will cover up to $1-million in cash, stocks, bonds or other assets that are missing from a client’s account when a brokerage goes under. The limit applies to each of several different account categories; for example, if you have a non-registered account and RRSP at the same institution, each would be covered for up to $1-million. (You can see a list of CIPF members here)

What if the assets in one of your brokerage accounts exceed the $1-million limit? Should you consider transferring some of your securities to a different institution to make sure you are fully covered by the CIPF?

For the average investor, it’s probably not worth the trouble, says Barbara Love, senior vice-president with CIPF. In a brokerage insolvency typically only a portion – if any – of the firm’s assets are missing. Once the trustee has distributed all of the available assets to customers, it’s very unlikely that any single client would face a shortfall that exceeds the $1-million limit, she says. An exception might be a rare instance where a client has a very large percentage of the total client assets held at the brokerage firm, in which case spreading the assets around might be prudent to minimize the investor’s exposure to that one institution.

It’s worth noting that in the past 25 years there have been just eight CIPF member insolvencies and CIPF’s total payout in those cases averaged about $3-million. That’s the combined payout to all customers, and it includes CIPF’s legal fees and other costs. Bottom line: You’ll almost certainly be fully covered by CIPF even if one of your accounts has more than $1-million in assets.

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Follow on Twitter: @johnheinzl

Also on The Globe and Mail

Money Monitor: Tax-efficient planning tips for retirement (The Canadian Press)
 

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