Risk averse Canadians are sitting on an “astoundingly massive” $1 trillion or more in cash, or near cash holdings, according to a recent study by Scotia Capital Inc. While we might pride ourselves on being prudent savers, some experts are warning that the country’s cash holdings are now so large that they could jeopardize Canada’s economic recovery. The other problem is that we’re not getting a good return on cash holdings. So should we hold cash or not?

It is certainly true that cash investments aren’t very exciting these days. Rates of return for so called “high” interest savings accounts run at around 1.5% or less, and 5 year GICs are only returning in the 3% range. And of course, over the long run, cash investments haven’t done as well as bonds or stock investments. But still, I like cash – a lot.

There’s much more to investment planning than just getting the best rate of return. Sure inflation is an important consideration. So too, is having enough money to meet future expenses and goals. BUT – if our investments are ultimately designed to help us enjoy our life, then we need to consider the emotional as well as “dollars and cents” implications of financial security. Being stressed about money doesn’t make for good investment decisions or a happy life.

As a financial educator, I know firsthand the value to clients of being more educated about how money and investments work – greater understanding of money usually leads to better financial decisions and less worry. But I also know that graphs, charts, and financial calculations can only go so far to relieve the anxiety caused by market fluctuations.

So what do these concerns mean to your portfolio?

Let’s start with a simple and obvious fact. We’re human. Sometimes we make irrational decisions based on emotions – sometimes fear, sometimes greed, sometimes wishful thinking. Even though we “know” we should keep our emotions from dictating our investment decisions, it is unlikely that our species is going to change this type of instinctual behavior anytime soon.

So you need to make investment decisions that suit all of your needs – including the very human need and desire for security. This means that cash investments should always be an integral part of your portfolio. The amount of cash you should hold is largely dependent on two factors. First is your tolerance for risk. Second are your cash needs for the near future.

For instance, if you don’t want to take any market risk at all, then your choices are pretty much limited to a 100% cash or government bond portfolio. (If you take this strategy, you should run the precise numbers to be sure that you’ll have enough to cover your long term needs after tax and after inflation.)

And even if you can accept a high level of risk in your overall portfolio, but need to use some of your funds in the next 2-3 years, your best bet is to hold the total amount you will need in cash or near-cash investments.

How does this work?
Let’s say you want to buy a house in 2 years but first have to save for the down payment. Your existing savings and new money should be held in cash investments so you can be sure that the money is there when you need it – regardless of what happens in the markets.

Or if you’re at retirement age and you need $3,000 a month ($36,000 annually) to fund your lifestyle, then keep a reserve of about $100,000 in cash to fund the next three years. This will give you the emotional upside of knowing that you have cash in the bank and you will be financially ok for the next few years.

By holding cash for your 2-3 year short term needs, you will be more comfortable with your other higher risk investments that you need for growth. Then even when the markets fluctuate wildly, it will be easier for you to resist the temptation to react emotionally because you know that some of your portfolio is protected. Not an exciting strategy but a good night’s sleep sure make sense to me. – Karin Mizgala

One of the things I remember most from my MBA years was doing case studies and coming up with strategy recommendations for companies. We were taught that one of the possible strategy options was the “do nothing scenario”. As eager MBAs who thought we knew better than the company itself, this was not usually the option of choice. It’s the same thing when it comes to how both clients and advisors manage mutual funds. The “do nothing scenario” is usually a non-starter.

When I was a commission-based financial planner who sold mutual funds, it was hard to resist the temptation to “do something” when clients were upset about the returns on their portfolio or on a particular fund. And I know I wasn’t the only advisor who felt that way.

In order to relieve the anxiety that goes along with a portfolio drop and the risk of potentially losing a client, the easiest thing to do is to “take action”. The advisor proves his/her worth by moving money around and the client feels that something is being done proactively to help them make money in the future. The problem is that this is often exactly the wrong thing to do.

Here’s what usually happens. The worst performing funds are sold, then recent strong performers are recommended/chosen as replacement funds. Let’s face it – it’s pretty hard to convince a client to move into a fund that has shown negative returns recently.

Unless the portfolio was badly planned upfront or there are truly valid reasons for moving out of the “dog” fund, switching funds usually amounts to “selling low” and “buying high”.  Emotionally, both client and advisor are temporarily satisfied, but this is clearly not a good strategy for making money long term. Several studies in the US and others in Australia have shown that “too much switching can result in lower returns.”

Dalbar Inc., a Boston consulting group, found that the average mutual fund investor usually gets a much lower return on their investment than the performance reported by the fund itself. Why?  Because of switches made in a chase for performance.

A better approach is to do your homework in advance of investing, come up with a game plan and then stick to it. If you want to work with an advisor, choose someone who has a very clear system for deciding when to buy, sell or hold funds. If you are acting as your own advisor, use ETFs or find a low-MER mutual fund company that has a smaller number of funds to choose from.

Having too many options makes it difficult even for professionals to make comparisons, track performance and to resist making fund switches. Spend the time upfront to create a solid, disciplined plan then, “forget-about-it”.  – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

If the great Mahatma was around today, I wonder if he would be scouring the TSX or the Indian Stock Exchange to check on his portfolio of socially responsible investments (SRIs)? Well, ok, I admit that the idea of Gandhi, or Mother Teresa, dabbling in the rough and tumble stock market seems just a little farfetched – if not a tad unseemly. But, nevertheless, there is worldwide movement afoot dedicated to ethical investing — where principles are as important as profits.

While SRI funds are themselves a relatively new investment phenomena, the idea and moral force behind them certainly is not. As far back as the 1750s abolitionists, such as the Quakers, put pressure on companies and individual investors to try and halt the slave trade. In the 1950s and 60s other groups, such as trade unions and Vietnam War protestors, tried to advance their social and political agendas by influencing where people spent and invested their money.

Socially responsible investing is big business now, with some researchers forecasting the SRI market in the US alone to reach $3 trillion by 2011. And the Americans are not alone in their appetite for this type of investment. In Europe, the SRI market reportedly grew from an estimated €1 trillion in 2005 to €1.6 trillion in 2007.

And Canada is following suit. Almost 20% of investments in this country now fall under the SRI umbrella – totaling some $609 billion in 2008.  In a sign that SRIs are here to stay, loyal Canadian investors are sticking with this class of investments despite the recession and recent market woes. In fact, according to some financial experts, the value of SRI assets in Canada has actually grown by 21 per cent over the past two years.

How to get a Good Return?
The big question for investors, however is how to get a good ROI, or return on investment, while still doing the right thing with their money. The answer comes down to five simple considerations:

1. Recognize and acknowledge that your individual investing decisions have far-reaching consequences not only for yourself but for society as a whole;
2. Ask yourself what industries or sectors you want to support (alternative energy companies, organic food producers) — or not support (alcohol, tobacco, gambling, weapons manufacturers);
3. Educate yourself about the specific companies and investment funds that support your social objectives and ideals;
4. Find a supportive investment advisor – one who will not only help you select companies or funds that meet your SRI guidelines – but that also fit in with your overall investment strategies and financial plan;
5. As always, check on the track record of the investments you are considering – and make sure you will be getting value for the fees being charged.

Here are some resources you may want to check out: the SRI Monitor, Jantzi Research.

There’s certainly debate on the concept of SRIs and whether they are really a sound investment or just a marketing ploy.  SRIs may not be perfect, but they are an important reminder that all of our financial decisions have an impact on the world around us – one investment at a time.

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

If nothing else, the financial turmoil over the past year or so has caused many investors to revisit their portfolios and rethink their investment strategies. Along the way, some have started to ask if they were getting good value from their investment advisors — or if they were better off going it alone.

Here is some good news, if you:
1.) Know, or at least suspect, that you are not getting the service and professional advice you need from your advisor
2.) You are considering switching advisors
3.) You want to continue using an advisor, but also want to become more informed and directly involved in your investment decisions
4.) You just want to go it alone — but could use some help.

Check out the Investors-Aid Co-op. It was formed in May 2008 by Garth Rustand, who now serves as Executive Director, along with a seasoned team of professional advisors. As they bill themselves: “Canada’s first co-operative for investors is run by members for members. It is the new way to invest.”

Garth was in the brokerage biz himself for 20 years so he knows “the other side”. He felt that “there wasn’t anything out there that provided truly objective information to help investors lower their costs of investing, and to protect them from products and services that just aren’t very good.”

The Co-op itself has got to be one of the greatest investments out there. A “lifetime” membership fee is just $35. For $30 more you can get two very helpful books to guide your investment strategies – whether you want to continue using an advisor or are ready to go strictly on your own.

I joined the Co-op myself and was especially impressed with the level of detail in their guidebooks. They outline specific portfolios and investments that were picked for quality and low fees. Another plus, is that the language is down to earth and very easy to read for the average investor. The sample portfolios feature lots of exchange-traded fund, (ETFs), but not exclusively. This is very helpful info if you’ve been considering ETFs or low-cost mutual funds but need some guidance and direction.

The Co-op also provides good consumer reports and other valuable investment information. Another membership plus is that you can email the Co-Op with your specific investment questions. And, for an additional charge, they can also provide you with an independent portfolio review. (In my opinion, the Co-op has way underpriced this valuable service!)

What I like most about the Co-Op is that it is educational in nature. They aren’t trying to “sell” you anything, other than straight-forward investor education and consumer info. They truly seem to have the investor’s best interest at heart.  Knowing how much money can be made as an investment advisor – and what Garth likely gave up financially to help out the rest of us – he sure isn’t motivated by the money anymore! – Karin Mizgala

You can learn more about the Investors-Aid Co-op at: www.investors-aid.coop

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.