The Portfolio Doctor

By David Cruise and Alison Griffiths
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We swear there is some question genie out there who plants ideas in our readers' heads. For the third month in a row we have received questions which cluster around the same topic. Last month it was C.I. Investments mutual funds. This month it is cash, cash, cash. Go figure.

Q: I have been a big follower of the Easy Chair Portfolio (a passive portfolio created in 1997 by Eric Kirzner) over the last few years buying iunits.  Do you have suggestions for a money market fund that is primarily cash, has a low MER and a good track record? Allison Barr

A: Ah, dream on! A low cost money market fund with a good return is almost an oxymoron these days. The only exceptions are money market funds with very high initial investment thresholds, $100,000 or more.

Right now your best cash bet, according to most passive investing experts, is to stick with GICs, T-bills or simply a high interest or money market savings account. With interest rates so low, the MERs on money market accounts eat up your return. High interest savings accounts are the simplest of the bunch, especially if you are still contributing to your investing portfolio.

If the funds are in a RRIF then purchasing 3-month GICs and rolling them over as they come due is a great way to go. You can expect to get around 4% (depending on how much cash you have to invest), which is as good or better than most money market funds.

Q: My husband and I run a small conference planning business. We are 43 and 45 with little retirement savings but enough to live on. We have no children. We are going to receive $50,000 for a large contract and can't decide how much to set aside in case our income is interrupted for any reason. We assume that just leaving it in cash is the best idea. Marion Hawkley

A: We have polled financial planners on this very topic a number of times. There are more rules of thumb than most couples have thumbs and all kinds of exceptions as well as if thises then thats and variables to consider.

In your case you have a wonderful opportunity to redress some financial planning holes in your life. Contemplate a few additional possibilities. You don't mention if you have life insurance. Rates have come down and you are still young enough to purchase term insurance without getting killed on the price. You might also consider looking into Critic Illness Insurance.

This is very important for the two of you since you depend on each other for income. If you have a mortgage then it is all the more critical to have protection should one or other of you depart this mortal coil.

You say you have little in the way of retirement savings. Since you will likely be paying more tax than usual with this income boost, why not use up some of your RRSP contribution room, bring down your taxes and start saving for retirement. It's never too late to begin.

Now to the income security blanket. At least three months is a good number to shoot for. If you can manage four months, even better. That is a large chunk of money for most people who are self-employed but since you have the money to do it, it makes sense to set that amount aside.

You are right to be thinking of cash or cash equivalents such as T-bills or GICs. However, ensure that whatever you purchase is highly liquid because if your income dries up, you need to get at the money quickly. Aim for short term GICs or a high interest savings account.

Q: I have an RESP ($18,000) and an RRSP ($119,000) managed by an investment adviser at my bank. There are 16 mutual funds total in the two accounts. I just noticed that there are deferred sales charge fees on the funds in the RESP. My son is going to college in January and my daughter will start university in September. What should I do because I will need the money soon? Serena P.

A: How about giving your adviser a cuff on the side of the head? Jeez. This drives us crazy. If the time frame for college and university was known (and most of us have a rough idea when the wee bairns are heading out into the world), then you should not have been buying funds with deferred sales charges. Selling your funds will trigger the fee.

You can start by asking why you were put in DSC funds so close to needing the money. If you challenge your adviser on this point you may get him or her to reduce or eliminate the fee because this is bad advice and bad planning.

If not then we suggest you sell the allowable 10% from each fund first. If that doesn't give you sufficient money for your children, next examine the funds that you've owned the longest (they will have the lowest DSC fee remaining) and also the funds which have risen the most.

Your Canadian funds, for example, should have done very well recently and probably should have been rebalanced anyway. Selling a portion, even if you have to pay a sales fee, is more palatable with a good performing fund. Finally, consider getting rid of one or more funds that have been long term poor performers.

You have a number of options but you need to sit down and work out which combination works best for you and triggers the least amount of fees. As for what to do with the money -- absolutely leave it in interest producing cash. Your son will need it in January. If his college fees are spread out over the year then put the remainder in short-term GICs. The same strategy will work for money earmarked for your daughter.

And by the way … you didn't ask, but you seem to have an awful lot of funds for the amount of money you have. Once you take care of the RESP business, perhaps it would be a good idea to sit down with the adviser and prune your RRSP funds back to 4 or 6 top performers.