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portfolio makeover

Dushan Milic/The Globe and Mail

After more than two decades working in marketing, Jess recently made a move she'd been contemplating for years. The 46-year-old Toronto resident left her full-time job to freelance. At least, that was her plan.

"I love being away from the rat race," Jess says. "I'm enjoying this break from over 22 years of corporate work and wonder if I have to work at all."

The married mother of one estimates she could make about $50,000 a year freelancing, if she had to. Her husband, Doug, 50, runs his own small business and makes about $80,000 a year. He has no plans to retire soon.

The couple is careful with finances. Jess says they live well within their means and have always made saving money a priority. Their mortgage is paid off.

"We have no debt," Jess says. "We've never been the types to keep up with the Joneses."

She also has a defined benefit pension plan that will pay about $10,000 a year (not indexed to inflation) if she waits until 65 to start payments. Nevertheless, the two still feel apprehensive about her leaving the working world.

"Can do I do this without dipping into our savings too much?" Jess asks. "Can I do this and still have enough to retire on? My husband says two entrepreneurs in the family is one too many."

To help her find some answers, we consulted Sophie Blais-Yalbir, senior financial adviser and partner at Calgary's WealthCo, and Ian Collings, a Vancouver certified financial planner and chartered financial analyst.

Both advisers say Jess doesn't have to work another day in her life if she doesn't want to, though Mr. Collings says that a little freelance income would be a "welcome supplement."

The basics


Home: valued at about $850,000

Doug's work/live studio: valued at about $300,000, with the mortgage being paid by his company

Cash in savings account: $257,635

Cash in U.S. savings account: $6,730

Registered retirement savings plan – Jess: $212,588; Doug: $270,000

Registered education savings plan: $31,500

Tax-free savings account: Jess: $27,493; Doug: $25,600

Non-registered savings: $46,284


Expenses: about $2,600 a month

Ms. Blais-Yalbir's tips

1. Make your portfolio work for you.

"Her portfolio screams: 'I worked hard to make my money, don't lose it!'" Ms. Blais-Yalbir says. "This is an extremely conservative portfolio. Her overall investment allocations are 39 per cent equity and 61 per cent fixed income and cash. Furthermore, 26 per cent of her assets are in fixed-income investments inside a mutual fund where they need to overcome a management expense ratio of 2.6 per cent to begin to generate a positive return. Currently this is dead money.

Based on her investment profile, Jess should have a portfolio with a higher allocation to long-term growth assets and a reduced focus on cash, Ms. Blais-Yalbir says. She also notes that Jess's portfolio isn't tax-efficient. "Based on her current holdings, her mutual fund fees will be north of $17,000 this year. None of this expense is tax deductible. Her biggest risk right now is having her portfolio keep pace with inflation."

2. Have confidence in the knowledge that you don't need to work if you don't want to.

"Even if Jess doesn't work, her husband does and their burn rate is low." With his annual income of $80,000, the family's yearly expenses of about $31,000, and their taxes being about $18,600, the family still has about $30,000 left over each year. That money can be used to maximize both of their TFSAs, their RESP until their child reaches 18, and Doug's RRSP. (If Jess isn't working, she can't contribute to her own RRSP.)

"Those deposits, in addition to what she has currently invested, will allow her to meet her retirement goals," Ms. Blais-Yalbir says. "The couple is to be congratulated for being such diligent savers and not keeping up with the Joneses. As a result the Joneses will be envying their financial position right now."

3. Consider working with a portfolio manager.

"The first thing to note in her portfolio is the lack of integration. I would consolidate her holdings under one trusted adviser."

She says too that there is little transparency in a mutual fund portfolio. "The nature of her investments presents challenges in understanding how the investments have performed," Ms. Blais-Yalbir says. "It's difficult to see how her current investments and overall asset allocation are the result of a properly constructed and well-executed financial plan. The successful execution of any financial plan through time is dependent on a regularly updated investment policy statement. By working with a trusted adviser and reviewing her portfolio and retirement plan on a regular basis, she'll be able to remain comfortable that she's making meaningful progress toward her goal and has the freedom to do what she wants to do."

Mr. Collings's tips

1. Mind the cash drag.

Mr. Collings notes that "cash and equivalents" in a portfolio include savings and chequing accounts, guaranteed investment certificates (GICs), money market funds, and so on. "If Jess's family needs to preserve over $300,000 for specific short-term needs, then these instruments are a great option," he says. "However, over any longer-term horizon, inflation may erode the real purchasing power of funds in these short-term instruments. Even GICs can drag on a portfolio's total returns over time.

2. Use passive investment strategies rather than active.

"With no debt, strong savings, home equity, business equity and, most importantly, a conservative spending rate, Jess and Doug have a lot of financial flexibility going forward," Mr. Collings says. However, many of the family's non-cash investments are following active rather than passive strategies.

"Active managers try to outguess the market by timing stock trades," he says. "Ironically, they're often buying and selling with other active players. Passive strategies, by contrast, seek to simply match the overall return of a market as a whole, with consistent holdings and lower annual costs.

"Many exchange traded funds [ETFs] and mutual funds follow passive strategies," he adds. "Along with lower costs, passive funds trade less frequently than active managers, which can reduce tax burden in non-registered accounts."

3. Decipher acronyms to make prudent portfolio changes.

"Mutual funds tend to have long, exciting names that don't fit on client statements and therefore end up abbreviated," Mr. Collings says. "For example, if we see 'XYZ Cdn Val DSC' on a statement, what are we to make of that?

"To use a football analogy, the first part of a name identifies the fund manager – the quarterback – the second part details the strategy, or the play book, while the suffix will tell you how you paid and will pay for the fund. So XYZ would be the manager of a Canadian Value fund that was sold with a deferred sales charge (DSC).

He explains that DSC and low load (LL) suffixes mean that the individual or organization you bought the fund through was paid a commission that you will have to pay for in the coming years either by staying in the fund or by paying an exit fee.

"Funds offered on a DSC or LL basis are almost always offered without these terms, therefore a shopping around is warranted," he says. "If Jess wants to sell any of her funds that have DSC and LL suffixes, this should be done carefully to minimize fee impacts.

"There are also many overlapping strategies in Jess's portfolio," he adds. "Two quarterbacks with the same play book are unlikely to have significantly different outcomes, but both will want to get paid."

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