For most Canadians, mutual funds are a mainstay of their investment portfolio. Many investors, however are angry and frustrated with the high fees they are being charged and with mutual funds that barely outperform the market – if they do that.  (Studies are showing that 70-80% do not outperform).  The big question I am now being asked is whether to switch out of mutual funds into ETFs (exchange traded funds).

In a couple of important respects ETFs are similar to mutual funds in that they are packages of investments bundled by a financial institution for sale to the investor and they are designed to diversify risk and opportunity. The essential distinction of ETFs is that they are a basket of investments tied to a specific “index”, such as the S&P/TSX composite index, Dow Jones Industrial Average or the S&P 500. Your personal ETF investment therefore mirrors the fortunes of whatever index your ETF fund is tied to. If the S&P/TSX, largely comprised of bank and commodity stocks, does well, then you do well.  If not….., well, you get the picture.

Here are some things to consider in making your decision on which one to purchase:

Lower fees are certainly a good reason to consider an indexing strategy.  (As I wrote in a previous column, recent studies have shown that Canadians are being charged amongst the highest fees in the world for their mutual funds.) Fees for indexing typically range between one-half and 1% – as opposed to costs of up to 2 ½ % for equity mutual funds.

ETF fees are lower for three primary reasons.  First, they do not require the same level of market research that mutual funds do, because they simply track an index instead of deciding on the merits and demerits of a bundle of stocks. Second, they are mainly sold through discount brokerage firms and this helps to keep costs down. Third, with ETFs you get little or nothing in the way of advice or service.

Lower fees are not everything, however. One of the main downsides to ETFs is that you are largely on your own to research, evaluate and to buy/sell them.  There are now hundreds of ETFs to choose from and you have to ask yourself if you’re really willing to do the background investigative work.

One reason to invest in a mutual fund portfolio is the advice that you get – or should get – when investing this way.  Yes you pay more, but a good advisor will consider such things as your risk tolerance, net worth, your retirement plans, and the rest of your portfolio mix, to better advise you on the funds that are best suited to you at the various stages of your financial life.

If you have over $500,000 to invest, you may qualify to work with an investment counsel firm where fees are much lower than the typical mutual fund portfolio, and you get advice too.  If you don’t fit that profile, but don’t want to go it completely alone, then check out low cost mutual funds, like those offered by Steadyhand, Leith Wheeler or Phillips Hager & North.  The level of advice that you get with them will largely depend on the size of your portfolio, but their funds are well worth considering.

Whatever route you decide to go, ETFs, traditional or lower cost mutual funds, you will be best served if you keep your investment decisions in line with your overall financial objectives and the time and energy you want to devote to your investments.  – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-for-service 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.

Bonds, along with cash, stocks and real estate, are among the most common forms of investments. They are, however the least understood – and not nearly as exciting as stocks, which come with the greater potential gains, but bigger risks as well.  Cash investments, like GICs are popular because they are safe and real estate is, well, real.  It is a tangible investment with the added attraction that you can hang pictures on the walls and lounge there in your pajamas. (Kinda tough to do that with other investments.) Nevertheless, bonds really should be considered when rounding out your portfolio.

Bonds are also referred to as income investments because they provide a set rate of return for the investor when held to maturity. They are simply a type of “IOU” issued by governments and corporations in return for the use of your money for a set period of time.  The bond issuers then use the money to pay for such things as roads and infrastructure improvements, in the case of municipalities and other levels of government, and in the case of companies, to finance business operations.

Investors like bonds for their “Fixed Income”
Because they are typically (although not always) backed by large companies and governments, bonds are generally considered to be a safer investment than stocks. They are often assigned a lower to moderate risk level assuming you hold your bond until maturity.  Bond maturities can range from one to 30 years in length.  In return for that margin of safety, you earn a set amount of interest for as long as you hold the bond.  Investors like them because they know what their returns will be year after year. For example, a bond with the face value of $10,000 and an interest rate of 5% will pay out $500 a year in interest. Today’s 10 year Government of Canada bonds are paying about 3.5%.

Check the Ratings!
But bonds are only as strong as the company or government that backs them. There are organizations like the Dominion Bond Rating Service and Moody’s that give grades to various types of bonds. For example, S&P’s “AAA” rating implies the smallest degree of investment risk.  A “Triple-A” is very hard to come by and is reserved for only the strongest companies and governments. In assessing the various risk factors, the rating agency will have done an important part of your homework for you, but make sure you still check those ratings — and understand them — before you invest your hard-earned cash in any bond.

The other thing to keep in mind is that there is a lively after-market for bonds. Bonds are considered to be liquid which means they can be sold prior to the maturity date and are regularly traded on the bond markets.  The value of your bond will rise and fall in relation to interest rates so this is where the risk comes in.  If you sell your bond before the maturity date you could be subject to a capital gain (a good thing) or a capital loss (not so good!).

Do you Own and Bonds or Bond Mutual Funds?
Holding bonds (either by buying them directly through a bank or broker or holding them through mutual funds) can be good in two ways.  They give you diversification from the volatility of stocks and the returns are usually higher than savings accounts or GICs. Most people should have some bond investments in their RSP or investment accounts so check your accounts to see if you do. If you aren’t sure, talk to your financial advisor and use this as an opportunity to learn more about what you are invested in.

Completed the Build your Own Financial Plan program and want to learn more about investing topics like these?  Check out our ongoing MoneyMastery program and take the next step toward financial independence.

In these challenging economic times, it is more important than ever that you know what you are really paying in various fees and commissions for your investments — and finding out what level of service you can expect for those charges.

Mutual funds are among the most popular investments that Canadians choose, but they have costs that very few people really understand.  When you buy and sell mutual funds you may pay a sales charge, called a “load”.  There are 3 types of load mutual funds:

Front-End Loads (FEL): These sales charges range between 0 – 5% of the amount of the initial investment. You pay this upfront commission when you purchase the funds and you may be able to negotiate the rate. The advantage of a front end load is that it is a fixed amount. You know how much money you have to invest, so you know the fee.

Back-End Loads (also called Deferred Sales Charges or DSC): You may pay this fee when you sell your mutual fund. Back-end loads range from 1% to 8% of your investment and it may be based on the original purchase value of your investment, or the market value at the time of sale. This fee usually declines the longer you own the mutual fund, reaching zero after a period of time – usually 6 or 7 years.  Ask your advisor and read the prospectus for a schedule of charges as this will tell you how long you must hold the mutual fund before the back-end load reduces to zero.

No-Load: Often banks and credit unions won’t charge a fee if you invest in their own funds. You can also buy no-load mutual funds directly from the company that manages them. Companies like Phillips, Hager & North, Leith Wheeler, Steadyhand or Altamira offer no-load funds. But read the prospectus, sometimes no-load mutual funds have a minimum investment requirement. Although not all mutual funds have a sales charge (e.g. no-load funds), all mutual funds charge a fee for ongoing management and administration of your investment.

Management Expense Ratio (MER) is the annual fee charged by mutual fund companies to investors. It covers expenses such as investment management, marketing, accounting, administrative costs and fees to investment salespeople. MERs typically range from 0.05% (usually for lower risk investments such as money market funds) to more than 2.5% (usually for Canadian and international stock funds). You can find out about the MER in a fund’s prospectus or by asking your advisor.

Mutual funds can play an integral role in a balanced investment portfolio, but only if you are fully aware of all the costs and charges that are associated with them. Ask questions!

Karin Mizgala is a Vancouver-based fee-for-service 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.

When making your investment decisions, it is wise to consider the various tax implications – both positive and negative. As always, first remember that your investments should reflect your goals and values, your time frame and your risk tolerance. As we emphasize in the Build Your Own Financial Plan program: “Tax advantages can change with the government, investment decisions should only change with your life”.

That said, here are some important guidelines on how investments are taxed for you to keep in mind:

• Registered Investments (RSPs & Pensions) – These are not taxed until you remove money from your registered investment. You will then be taxed at the rate applicable on your income at withdrawal, which is usually at a lower rate at retirement than when you were working.  You also get a tax deduction when you contribute to a registered investment.
  

• Tax-Free Savings Account (TFSA): There is no tax on income earned from non-registered mutual funds or investments held in a TFSA, but you don’t get a tax deduction when you make a contribution to this type of account.

• Non-Registered Investments – Interest:  Interest on non-registered investments is fully taxable at your applicable tax rate. If you have money in non-registered investments, it is important to note that safer investments tend to be taxed more heavily.

• Non-Registered Investments – Dividends:  Dividend income from non- registered investments in Canadian companies qualifies for the dividend tax credit. This is an incentive for Canadians to invest in Canadian companies.

• Non-Registered Investments – Capital Gains: Capital gains are taxable on non-registered investments at your applicable tax rate — but only for 50% of your realized capital gains. Investments, such as stocks, bonds and certain types of mutual funds typically realize capital gains (or capital losses) in the year you sell. If your stock value goes up but you don’t sell, the gain is not realized, and therefore not taxed.
  

• Note: If you hold mutual funds (even if you don’t sell them) you might get a T3 slip reporting a capital gain. This is because the fund manager has sold investments within the fund that has a realized capital gain. When you sell your mutual fund, you will need to have records of the “adjusted cost base” of your fund to report your capital gain or loss on your tax return.  You can get this information from your mutual fund company or advisor.
• For more information on mutual funds see the Canada Revenue Agency’s publication RC4169 Tax treatment of mutual funds for investors.
  While learning about tax stuff may not be exciting, it’s important to understand the fundamentals of what you’re investing in and what you can expect to really earn from your investments – after fees and after taxes.  I’ll be speaking with Dayna Holland, CA about tax on investments in our upcoming MoneyMastery Ask the Expert teleclass.

If you have the basics of your financial plan covered, but are finding that you’re not as on top of your money and investments as you should be, email or call me at 604 880-4143 to talk about how the MoneyMastery program can help.

Karin Mizgala is a Vancouver-based fee-for-service 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.

Mutual funds remain a principal source of investments for most Canadians, and for good reason. They can offer an attractive way to hold a broad range of investments. However, as with all investments, you need to know exactly what you are buying and what the true costs are. Here are a few basic things to keep in mind.

How do Mutual Funds Work?
A mutual fund lets you invest in a group of stocks, bonds or cash investments picked by a professional fund manager. Essentially, you pool your money with a lot of other investors to buy units, or shares of a mutual fund. Some people mistakenly assume mutual funds are higher risk investments, but that isn’t necessarily the case. The risk associated with any mutual fund is determined by the investments in the fund, therefore they can be low, medium or high risk. And whether you are looking for safety, income or growth from your investment, you can likely find a mutual fund to fit your needs.

Your fortunes are, however tied to the skill and experience of the fund manager who buys and sells the investments at the core of the fund – and, of course, to the markets in general. Look at your fund manager’s track record, but remember that these are challenging times for even the most seasoned investors and institutions out there. A great past performance does not necessarily guarantee future success – but it does help us in our decision making.

Why would I Invest in Mutual Funds?
Some of the advantages of mutual funds are:
1) Affordability. You can invest as little as $25 or $50 a month.

2) Convenience: You can make monthly contributions and you can buy mutual funds through most financial institutions.

3) Diversification: The risk is spread over more investments than the average person can reasonably hold.

4) Expertise: The investments in the fund are chosen by professionals who can do more extensive research and analysis than most individual investors.

5) Disclosure: Stringent regulations outline how mutual funds must be set up and managed, and how investors are informed. Before you invest you will be given a document called a prospectus which itemizes fees and lists the investments in the mutual fund.

6) Flexibility: You can easily buy and sell your units in a mutual fund. You aren’t locked in (although there may be redemption charges to sell your investments – ask before investing).

7)  International Investments: It can be difficult for the average investor to buy stocks and bonds outside of Canada (with the exception of the US). Mutual funds make it easy.

Are Mutual Funds for everyone?
The short answer is, no. There are other options including: index funds, buying individual stocks and bonds, and real estate.  You need to know how involved you want to be in investment decisions, how much you have to invest, rates of return, and fees associated with mutual funds. This is the time to do some homework. Certainly you can get some expert advice, but keep in mind that most financial advisors are also sales people and every investor is ultimately responsible for their own investments. Remember, to “Delegate – Don’t Abdicate” responsibility for your money.

If you want to have a better understanding of investments, check out our ongoing MoneyMastery program open to Karin and Sheila’s clients and graduates of the Build your Own Financial Plan program.

Since the downturn, I’ve been fielding a lot of angry calls from disgruntled investors. I am reminded of the movie, “Network”, which I saw again recently. In the film Albert Finney has everyone watching his TV show rushing to their windows to yell, “I’m mad as hell and I’m not going to take it anymore.” I suspect a lot of us feel like shouting from the rooftops with him.

But the problem is that nobody quite knows who to blame for the mess and where to turn for solutions. Some are angry at governments for not regulating the financial industry more. Many are thinking of changing advisors or are trying to find new investment vehicles.  Some are blaming themselves for not asking more questions or making different decisions before the market meltdown.  The question is, what do you do now and who do you turn to for help?

Set Realistic Expectations

If you stay with your current advisor or switch to a new one, make sure you have reasonable expectations. Advisors aren’t fortune tellers. Most in the mutual fund industry advocate a buy and hold strategy, because, historically, this approach has worked better than trying to time the markets. What you can and should expect from any advisor is help in creating a customized investment plan, transparent disclosure of fees, and easy to understand reporting of your returns. Keep in mind that most investment advisors work on commission or earn a percentage of what you invest, so their services are not “free”. Make sure you understand exactly what services they provide for their fees and what their potential biases might be.

Using a “Fee-Only” Financial Planner for your Financial Plan

If you don’t want to invest on your own, an investment advisor can help you buy and sell stocks, bonds, mutual funds and other investments.  But if you want help with your financial plan, you are better off using the services of the small but growing number of “fee-only” or “fee-for-service” financial planners across Canada.

“Fee-only” financial planners should be able to advise you on all aspects of your financial life, not just investments. They can help you with setting financial and life goals; developing a personal net worth statement; real estate decisions; retirement and estate planning; household budgeting; debt reduction; coping with life transitions such as divorce or the death of a spouse. The best of these services will also place a strong emphasis on personal financial education so that you are better informed, more confident and in control of your financial affairs.

“Fee-only” planners charge a fee for their advice and services, just as an accountant or lawyer would do, typically $150-$300/hour, or on a project basis.  Ask them the same tough questions you would ask any other financial advisor. Make sure they disclose whether or not they sell any products.  (Some do even though they call themselves ‘fee-only’.) You can find a list of “fee-only” financial planners at www.moneysense.ca.

Karin Mizgala

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

In these challenging economic times, it is more important than ever that you know what you are really paying in various fees and commissions for your investments — and finding out what level of service you can expect for those charges.

Mutual funds are among the most popular investments that Canadians make, but they have costs that very few people really understand.  When you buy and sell mutual funds you may pay a sales charge, called a “load”.  There are 3 types of load mutual funds:

Front-End Loads (FEL): These sales charges range between 0 – 5% of the amount of the initial investment. You pay this upfront commission when you purchase the funds and you may be able to negotiate the rate. The advantage of a front end load is that it is a fixed amount. You know how much money you have to invest, so you know the fee.

Back-End Loads (also called Deferred Sales Charges or DSC): You pay this fee when you sell your mutual fund. Back-end loads range from 1% to 8% of your investment and it may be based on the original purchase value of your investment, or the market value at the time of sale. This fee usually declines the longer you own the mutual fund, reaching zero after a period of time – usually 6 or 7 years.  Ask your advisor and read the prospectus for a schedule of charges as this will tell you how long you must hold the mutual fund before the back-end load reduces to zero.

No-Load: Often banks and credit unions won’t charge a fee if you invest in their own funds. You can also buy no-load mutual funds directly from the company that manages them. Companies like Phillips, Hager & North, Leith Wheeler, Steadyhand or Altamira offer no-load funds. But read the prospectus, sometimes no-load mutual funds have a minimum investment requirement. Although not all mutual funds have a sales charge (e.g. no-load funds), all mutual funds charge a fee for ongoing management and administration of your investment.

Management Expense Ratio (MER) is the annual fee charged by mutual fund companies to investors. It covers expenses such as investment management, marketing, accounting, administrative costs and fees to investment salespeople. MERs typically range from 0.05% (usually for lower risk investments such as money market funds) to more than 2.5% (usually for Canadian and international stock funds). You can find out about the MER in a fund’s prospectus or by asking your advisor.

Mutual funds can play an integral role in a balanced investment portfolio, but only if you are fully aware of all the costs and charges that are associated with them. Ask questions!  – Karin Mizgala

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

You’ve heard the word many times and you may even have some of your money invested in them.  But do you really know what a stock is and better yet, could you explain what it is to your daughter?  If not, read on….

What is a stock?
At some point, just about every company needs to raise money, whether to start operations, to build a factory, or to take on new staff.  Typically companies do one of two things when they need more cash:

1) They borrow the money from a bank or from individuals, or

2) They raise it from investors by selling them a piece of the company (called stocks or shares in the company)

If you buy stocks and become a shareholder, you are then a part owner in the company with a claim (however small it may be) on every asset (land, buildings, chairs, computers, etc.) and on whatever the company earns.

How do I make money from stocks?
There are two ways you can make money from stocks:

1) When the stock price goes up –  if the value of your stock goes up over time, your stocks could become worth more than you paid for them. And if at that point you sell your stocks, the difference between your purchase price and your selling price is called a capital gain.

For example: if you buy 10 shares of ABC company for $10 each, you will have invested $100.  If the share price goes up to $20 and you sell your 10 shares, you will now have $200, which means your stocks are worth $100 more than they were before. If you sell the stocks for $200 you will then have what’s called a “capital gain” of $100 on your investment. (Your capital gain may be taxable – we’ll talk about investment taxation in a future column).

2) When you receive dividends – when an established company makes a profit, it may choose to pay the profit out to its shareholders, rather than invest it back into the company. These payments are called dividends. Dividends are often paid quarterly and the amount you get depends on how many shares you own and the amount per share that the company decides to distribute.

Of course the flip side is that:

1) If your stock price goes down – and you have to sell your stocks at a time when they are worth less than what you initially paid, you incur a capital loss, which is a fancy way of saying you’ve lost at least some of your initial investment.

2) Dividends are not guaranteed – if the company stops making a profit, or if it goes through a change and decides to reinvest the profit in the company, it can stop paying dividends. At that point you could be out of an income stream.

Why would I invest in stocks if I could lose money?
In spite of the recent turmoil in the stock market, over the last 15 years Canadian stocks* (including reinvested dividends) have increased by an average of 7.09% per year compared to 4% for cash type investments. If you are saving for something that is at least 7-10 years away like retirement, having some of your money invested in stocks or stock mutual funds should help you get there faster.  But before investing in stocks, make sure you have a solid plan and a good understanding of what you’re investing in so you stay calm when the inevitable fluctuations happen along the way.

* As of Feb 2, 2009 – TSX/S&P Total Return

Karin Mizgala is a Vancouver-based fee-for-service 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.