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portfolio makeover

Alberta couple wants to travel the world, and spend time at a yet-to-be purchased vacation property in the mountains.Dushan Milic

Harold and Tara have big retirement dreams. They want to travel the world, and spend time at a yet-to-be purchased vacation property in the mountains. Tara might even pursue a PhD.

The problem is they're not sure their investment portfolio can support their big plans.

"It seems like we're pouring money into our investments and it's going out the bottom," says Tara, in her late 30s, who works in the non-profit sector and earns about $73,000 a year.

The Alberta couple, who have a young child, at one time had more than $400,000 in investments under management with their adviser, but since the 2008 crash, their money has been cut in half and it's never recovered.

Recent injections of cash haven't helped much either.

"The TFSA [tax-free savings account] is supposed to be this great thing because you're not going to be paying tax on the gains," says Harold, a government worker in his early 50s, who earns about $90,000. "But where are those gains?"

So far, the couple has witnessed only sizeable losses in their TFSAs. While Harold has maximized his contributions – more than $25,000 – the portfolio today is worth about $4,000. Tara's TFSA account now sits at about $1,800 after making more than $16,000 in contributions.

They've sustained most of their losses by investing in junior resource firms and other small cap ventures, investments their adviser had extolled as having tremendous upsides.

"He just keeps saying, 'Hold on, hold on. Things are going to come back,' but we've been holding on for years now," says Harold, who had planned to retire at 60. "How long do we hold on before we cut our losses and start again?"

Meanwhile, they're finding it difficult to maintain their current lifestyle. They've accumulated about $18,000 of consumer debt, and they can't help but worry that their investment strategy has completely sunk their retirement plans.

"I've just kind of assumed given the circumstances that I'm going to work as long as I'm alive," Harold says. "I just don't know what's possible any more."

Calgary financial advisers Patti Dolan with Raymond James and Sue Derlago with National Bank Financial examined Tara and Harold's finances and had the following advice.

The basics:

Harold's assets:

Non-registered investments: $16,452

RRSP: $78,507

LIRA: $114,190

TFSA: $4,564

Tara's assets:

RRSP: $18,723

LIRA: $6,307

TFSA: $1,865

Ms. Dolan's tips:

1. Harold and Tara need an investment strategy that makes sense for them. "Currently their portfolio is very aggressive and highly speculative, which may not be desirable at this stage of planning," Ms. Dolan says. "With Harold considering retirement within 10 years he can ill afford 50-per-cent losses in his portfolio." They need to meet with a financial adviser who will ask them a number of questions about their goals, along with their tolerance for market losses, to develop a suitable plan that has a high probability of success. Based on their current investment selection, it's clear that the advice they've received thus far does not match their long-term plans.

2. They're not getting their money's worth on the fees paid to their adviser. While the couple pay a low-cost annual fee for management of their investments, Ms. Dolan says they are not reaping any benefit from this arrangement. "From my review of the statements it appears the accounts are being charged a 1-per-cent management fee – for what?" she asks. "The concept of paying a percentage of assets is to lower commission costs." Their account shows little activity in recent months, and it's clear that most of the past activity has only served to hurt their financial position. "If you are paying a fee, no matter if you are making or losing money, there should be activity in the account to justify the money the adviser is receiving."

3. It's time to cut their losses. Tara and Harold can hold onto losing investments for only so long. While they wait for highly speculative resource stocks to recover and fulfill their promise, they've been missing out on a bull market that began in March . In the past five years the TSX Composite Index has increased in value by about 65 per cent, she says. And the S&P 500 has an annualized return of almost 18 per cent since 2009. Meanwhile, they've been not only holding onto losing bets, they've also been doubling down with more highly speculative investments through their TFSAs – which have incurred losses that cannot even be realized to help offset taxes on future capital gains. "Holding onto a loss position can be detrimental over the long term," Ms. Dolan says. "It's kind of like betting on a dead horse."

Ms. Derlago's tips:

1. Their portfolio is heavily concentrated in small cap resource firms. Most of their money is invested in junior mining, oil and gas and other high-risk firms that are prone to wild swings in value. "Unfortunately their experience with volatility has primarily been to the downside over the last number of years," Ms. Derlago says. "The frustration this couple are feeling is understandable, as these sectors can be extremely volatile." At best, risky junior resource stocks can be a complementary investment to their core portfolio that should consist of much more conservative investments that provide more consistent returns.

2. Harold and Tara need a properly diversified portfolio. Their investments should include bonds, cash and blue-chip stocks that pay regular dividends – not just speculative stocks and cash, which largely describes their current portfolio. "Tara and Harold should move toward an asset allocation of 5 per cent cash, 35 per cent fixed income and the remaining 60 per cent in equities with broad diversification and good cash flow," Ms. Derlago says, adding the portfolio's goal should be providing a consistent market return. "This would also entail investing in high-quality Canadian dividend payers, where a portfolio of this nature can generate a dividend yield in the range of 4.5 to 4.7 per cent."

3. Retirement at 60 for Harold is highly unlikely. At a minimum, the couple should work 11 years to build up a decently-sized portfolio of well-diversified investments. "If they can achieve a 5.7-per-cent rate of return for the next 11 years, their RRSPs and TFSAs would be worth approximately $479,441," Ms. Derlago says. With their work pensions, OAS and CPP, they would have an after-tax combined income of about $65,000 a year. Given that they currently take home about $110,000 a year, and are still struggling to make ends meet, they may find living on about 40 per cent less in retirement challenging, especially if they want to travel extensively, fund a PhD and purchase a vacation property.

These goals require Tara and Harold to save more than $360 a month than they're currently contributing to their investments. Reducing costs now – such as $750 a month for travel – will go a long way to decreasing debt while increasing cash flow that can be diverted to a well-diversified portfolio that provides consistent returns instead of dream-shattering losses.