A.T. Financial Newsletter
Shield your fund portfolio from
these 5 stealth bombers
Most mutual fund investors know about the risks of having too little diversification or not enough exposure to equities. Other risks are less obvious, but that doesn't mean they're any less of a threat. Take a look at these five stealth bombers on a mission to hamper the long-term success of unwary investors. In fact, they're such a threat, they should really be called “wealth bombers.”
1. HOME COUNTRY BIAS
Canada is a global leader in some sectors (resources and banking, for example), but we are not a powerhouse in healthcare, information technology, or consumer products. Including international equity and bond funds in your portfolio gives you exposure to other economies, currencies, and market cycles, providing you with the benefits of growth potential outside of Canada as well as protection from domestic market contractions.
2. LIQUIDITY
Liquidity, or the ability to get at your money when you need it, is a cornerstone of financial security. If you have significant capital tied up in real estate, locked-in investments, or even GICs, this could be a significant wealth bomber. We don’t necessarily have to strip those securities from your portfolio, but rather counterweight them with liquid assets such as money market mutual funds.
3. PORTFOLIO DILUTION
Dilution can be a serious problem for investors who have multiple investment accounts at different institutions, as there may be significant overlap between your portfolios. As well, you may be paying more than necessary in fees and expenses to maintain all of those accounts. Consolidation is the answer here. With it, you can eliminate duplication, reduce fees, and ensure your holdings are working effectively together to achieve your overall goals.
4. TAXATION
Taxes are like a syphon, draining away your funds’ returns. Protecting against this means more than just holding income funds in your registered plans. It means taking advantage of funds that invest specifically to minimize your tax liabilities. Depending on your specific needs and objectives, these might include corporate class funds or return-of-capital funds.
5. INFLATION
With inflation maintaining a fairly low profile for the last several years, it’s easy to forget how insidious it can be. But over the long term, it’s B52-like in its capacity to devastate. Case in point: An item costing $100 50 years ago would cost almost $750 today.1 In addition, some things tend to go up faster than the overall rate of inflation. Gas is a good example. From 2009 to 2010, the price of gas rose 9.1% while the CPI rose just 1.8%.2 Protecting yourself from inflation means insulating your portfolio with some of the so-called “inflation-proof” securities, including real estate funds, precious metals funds, oil and gas funds, and real return bond funds.
Want to learn more about the “stealth bombers” and the steps we can take to protect your portfolio? Feel free to call or make an appointment to come in and speak to us.
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