Diversifying by Account PDF View
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Do you and your spouse listen to the same music? Do you like the same TV shows? Sometimes, but not all the time, right?
Why should it be any different for investing? You have different points of view, different biases, and different feelings about risk. As a result, it often makes sense for different people to hold slightly different fund managers, styles and strategies within their portfolios. Let’s call this, “investing by personality”. It can also make sense to hold different portfolio managers or styles based on the type of investment account you’re considering. Let’s call this, “investing by account”.
Investing by personality involves putting fund managers in your portfolio that suit your overall feelings about investing. When you fill out an investment questionnaire with us at the start of our relationship and during periodic reviews and updates, you tell us your thoughts about investments with respect to your goals, objectives, and tolerance for risk. Your spouse’s questionnaire might look quite different if asked independently.
When we look at your retirement needs and goals, we may determine that a particular investment would be quite useful for your portfolio. Each spouse completes their own questionnaire to determine their individual investment needs. When considering a fund for a couple’s accounts, one of your questionnaires might tell us that you are not comfortable with this higher risk strategy, while the second spouse might be very comfortable with it.
When we are designing your portfolio, we will then put the higher risk fund into the spouse’s portfolio with the higher risk tolerance. You will both benefit from the long-term gains from this strategy as a household; however, the investing personality of each spouse is being respected.
Investing by account means recognizing that certain portfolio managers and strategies are better served in certain accounts. Let’s consider the TFSA for example. Investments within a TFSA accumulate income free of tax. Due to this special situation, it makes sense to hold investments within this portfolio that either generate a lot of taxable gains or are taxed inefficiently. The Canoe Energy strategy that we talked about above would be an example of a good strategy fora TFSA because of the higher potential for large taxable capital gains. A small cap fund or emerging market strategy would be similar. If you are an investor with an aversion to risk, fixed income investments make sense to be held in a TFSA because interest income is taxed at a much higher rate than capital gains or Canadian dividends.
So, if you can bury that income in a TFSA, it makes good sense to do so. For the same reason, holding interest bearing investments in a RRSP is a good decision for tax purposes as well. Finally, if you have a non-registered account, it is common to invest your Canadian Equity funds there, because although income from that portfolio is fully taxable, Canadian dividends benefit from the dividend tax credit which allows you to essentially cut the tax in half.
At LGK Investments of Aligned Capital Partners Inc., once you complete that investment questionnaire, we don’t just set you up with a package of mutual funds that is identical across all accounts. We further tailor the strategy so that your portfolio suits you, your needs, and your risk tolerance. In addition, we are always aware of where a particular portfolio manager is most useful to you from an account point of view. To put it simply, your portfolio suits your family and your overall needs in aggregate, and on an account by account basis, your portfolio suits you as an individual. Both are important.