I am a 50-year-old self-employed single male with about $75,000 (non-RRSP) invested in too many mutual funds (I also have $80,000.00 in RRSPs). I am looking to simplify my non-RRSP portfolio as much as possible and after much thought and research, have come up with the following formula.
Blue Chip Stocks: 33 1/3 per cent in Phillips, Hager & North Dividend Income Fund
Balanced: 33 1/3 per cent in TD Monthly Income Fund
Bonds: 33 1/3 per cent in TD Real Return Bond Fund
My objectives are:
1) A simple portfolio that needs very little maintenance.
2) Fairly low to average risk.
3) Income generating funds with monthly or quarterly distributions (reinvested until retirement)
4) 10-12 per cent average for portfolio based on three and five-year rates of return.
5) Low MERs.
6) Consistent fund performance (past performance of no more than one negative year in the last 10).
Do you think with only three mutual funds in this portfolio that I would be putting too many eggs in not enough baskets, i.e. have I simplified too much, thus raising the risk? Do you think my objectives are sound? — N.D.
Gordon’s answer: Your objeives are sound except for the target annual return of 10 per cent-12 per cent. I believe this is far too high based on this portfolio. A very large percentage of your assets will be in bonds and other income-generating securities. These performed very well in the early years of this decade when interest rates were falling. They cannot be expected to generate similar returns in the next three years when rates are expected to rise. I suggest that a target of 6 per cent to 8 per cent is more realistic.
The funds you have selected are all good quality, although I should mention that we recently dropped TD Monthly Income Fund from the Recommended List of our Mutual Funds Update newsletter after they reduced their distributions. We are now recommending either CIBC Monthly Income or RBC Monthly Income.
Your portfolio does have the advantage of simplicity and it is easy to monitor. As a general rule I would like to see a little more diversification but if you are comfortable with this then try it out. Keep a close watch on how it performs, however, and whether it is meeting your standards.