By Scott Ronalds
Heavy rain, trade rumours around the Canucks and RRSP ads everywhere. It’s February in Vancouver. And it’s the time of year when Bruce checks in with us to review his portfolio and make his annual RRSP contribution. (We’ve been encouraging him to set up a monthly contribution plan to avoid the scramble of finding the money for a large lump sum purchase, but that’s another matter.)
Bruce and his wife Courtney each plan to contribute $14,000 to their RRSPs this year. They’re not sure what to make of the headlines they’ve been reading about the markets, and heard that we’ve got a new inventory of running shirts and toques, so they made an appointment to come to World Headquarters for some advice and swag.
We reviewed their performance, asset mix, and fees (using the Q4 account statement as a guide). The key takeaways were:
Their portfolio was up 6% last year. While it was a nice return in absolute terms, their portfolio didn’t keep pace with the broader markets because the Small-Cap Fund and Global Equity Fund both had tough years. The areas of strength in their portfolio were North American stocks (Equity Fund) and bonds (Income Fund).
- They’ve now been clients for four years, and their portfolio has done well (returning close to 10% per year). The equity funds have been the main drivers of performance – with each fund carrying the load at different times – but the Income Fund has also done well.
- Their portfolio with Steadyhand is invested in the Savings Fund (7%), Income Fund (28%), Equity Fund (28%), Global Equity Fund (26%) and Small-Cap Equity fund (11%). Their resulting asset mix is 69% stocks (30% Canadian; 39% foreign) and 31% fixed income (11% cash; 20% bonds). Their strategic asset mix (SAM) calls for 65-70% stocks and 30-35% fixed income.
- Their all-in fee is under 1.10% (after rebates).
As for their personal situation, not much has changed. Bruce still enjoys his job and makes a good salary as a software engineer, and Courtney is now working full-time in a marketing role. They’re looking forward to Spring Break with the kids at their townhouse in Palm Springs, and are considering some minor renovations to their North Vancouver home in the fall.
Turning to their contribution, we encouraged Bruce and Courtney to stick to their SAM – which should come as no surprise.
We explained to the couple that we still believe stocks will provide the best returns over the next five years, but because of stretched valuations, recommended their equity weighting be no higher than their long-term target. As for fixed income, bonds had a very strong year in 2014, which makes them even more expensive (read more on our views here). We recommended, therefore, that they keep their bond holdings below their long-term target and continue to hold a cash reserve in lieu.
Bruce and Courtney agreed that it makes good sense to stay on track with their SAM. They are comfortable with their equity weighting remaining closer to the higher end of their target. Bruce has a particular liking for the Small-Cap Fund and feels it’s a good time to add to it when it’s down. We factored this into our analysis, and recommended that they allocate their contribution as follows:
$5,000 Savings Fund
- $8,000 Income Fund
- $5,000 Global Equity Fund
- $10,000 Small-Cap Equity Fund
This keeps their SAM in line and brings their fund weightings closer to their original allocation. Their stock weighting will remain slightly below 70%, and their cash reserve in place.
Bruce and Courtney left the office feeling good about their portfolio, and looking good in their new toques. Although they conceded that an umbrella would be more appropriate for their local ski hill. Damn pineapple express.
Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.