Saturday, September 19, 2009

The 5 W's (plus 'How') in Investing

A recent story in Canada's Globe and Mail, by Tom Bradley, President of Steadyhand Investment Funds prompted this blogging.

Mr. Bradley's story contends that most mutual fund investors are far too complacent when there has been a change of managerial talent at the head of a fund (or a merger into another fund), as this may produce a radical change in investment style - a style which perhaps does not fit into your risk profile or asset allocation plans.

"Sometimes the investment approach has a history and is more enduring than any one individual. At Burgundy and Beutel Goodman for instance, the investment teams are fine-tuned from time to time, but the approach never changes. The “who” is important, but not as much as the “how.”

So every change is different and they don't all necessitate the client taking action. But like my old institutional clients did when there was a significant shift in investment philosophy, people or business practices, you should at least put the fund on a watch list. In a well-constructed portfolio that holds between five to eight funds, every slot has a purpose. If someone else is making changes to it, you need to pay attention.

Mr. Bradley's comment covers a couple of the W5 (& "How") questions you should ask when allocating to your portfolio. What is left unsaid, is the larger question of "Why?"

I would ask "why" invest in mutual funds today? If you don't know the difference between MER and REM and don't know the pain of one of them, and the beauty of the other, then you shouldn't be investing in mutual funds (other than index funds). What you should be doing is setting up a risk profile, a broad asset allocation strategy, then seeking the lowest cost method to accomplish that task (hint - see MER).

I have written many times on couch potato portfolios, and the rationale for, and outperformance of, them remains as strong as ever. For most equity investors, an EFT or index portfolio with equal measures of:

  1. Their home country index;

  2. Emerging market exposure;

  3. US index;

  4. International index; and

  5. One speciality index (here's where you get to "freestyle") ....

should be sufficient to match or better the market in the long haul. Control of risk, and costs, as always, remain key. A low cost, low turnover, portfolio constructed per above should ably help with both criteria.

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1 comment:

Rob said...

Hi, just a question that maybe someone can answer: For a Canadian investor who is comparing iShares EEM vs. XEM to be held in an RSP, what are some things to consider before making a choice? Obviously there's the USD exposure with EEM, and a slight difference in fees, but how about things like tax implications(if any from foreign ETFs held in an RSP), or other considerations? Your input would be greatly appreciated!