How to balance your equity mutual funds

Whether you invest in equity mutual funds or directly in stocks, you need to diversify your holdings and balance them to suit your own investment circumstances and objectives. Below we show you how do do that, using eight of the funds from “The Top-40: Canada’s Best Mutual Funds” list.

Slicing a cake into equal portions is an acquired skill. Especially if you want a truly ‘happy’ birthday party. But it’s not going to help you divide your equity mutual fund portfolio into appropriate slices.

Mutual funds have what you might call ‘personalities’, just like people. That’s especially true of the best funds, such as the eight from our Mutual Fund Planning Guide that are discussed below.

Managers of the best funds are aware of their own all-too-human limitations. They know better than to act on whim or impulse. They do what they say they are going to do, which is usually what they do best. By sticking with funds like these, investors know what they are getting into when they invest. Using this knowledge, you can match your mutual-fund holdings to your investment temperament and objectives.

How we assess risk

When we assess risk we look beyond mathematical measures of past performance. We also look beyond the simple appeal of the hottest investment concepts of the day. Instead, we look at equity fund portfolios the way an experienced stock investor looks at his or her own individual holdings. You should only take on a degree of risk that you can knowingly and willingly accept.

Take foreign investments, for example. Geographical diversification cuts risk, of course. But foreign stocks as a class also expose you, and fund managers, to risks that you don’t get in Canada. These include language barriers, unpredictable legal systems, currency devaluations and so on.

Managers of international funds flatter themselves when they think they can overcome all these obstacles, even while operating at a distance and through an interpreter. But the performance record shows that it’s difficult enough for many mutual-fund managers to get it right here in Canada let alone far-flung countries and regions. (Most fund managers know how to make money anywhere in buoyant years, of course, but market setbacks inevitably occur.)

Small-cap and junior stocks are another area of potential risk. Investment in junior stocks can and often does bring higher profits than you get in larger, better-established companies, at least over periods of five to 10 years or more. But juniors also expose you to greater risk of loss when your choices (or fund’s choices) go bad. Then too, in a market setback, funds that invest in junior stocks often suffer more than those that invest in senior companies.

At all times, we think you should stick with mutual funds that are run by experienced, successful managers, such as those funds in our Mutual Fund Planning Guide. But if you plan to invest in mutual funds only, you should also plan to invest in a variety of funds to achieve balance in your overall holdings. You don’t have to buy all your funds at once, needless to say. But you should vary the sums you put in each fund according to the amount and kind of risk you are willing to accept in your portfolio.

Buy funds in the right proportion

Now let’s take a look at eight equity funds from our Mutual Fund Planning Guide that have distinct personalities.

All eight of the funds are buys. But you still need to decide on the right funds as well as the right proportions.

A conservative investor who seeks modest income and capital growth, and who is highly safety conscious, might wish to apportion his funds as follows: Dynamic Equity Income, 45 per cent; Fidelity True North, 35 per cent; and Capital Group Global Equity, 20 per cent.

Here’s a balanced fund for an investor seeking a balance between growth and safety, with a secondary goal of modest income: Fidelity True North, 35 per cent; Mawer Canadian Equity, 30 per cent; Capital Group Global Equity, 25 per cent; and RBC Emerging Markets Equity, 10 per cent.

A growth investor gives priority to capital appreciation over safety and income. Here’s a growth portfolio: Fidelity True North, 20 per cent; Mawer Canadian Equity, 20 per cent; IA Clarington Canadian Small Cap, 10 per cent; Capital Group Global Equity, 35 per cent; TD US Mid-cap Growth, five per cent; TD Global Entertainment and Communications, five per cent; and RBC Emerging Markets Equity, five per cent.

The key is to apportion your holdings to fit your overall plan.

This is an edited version of an article that was originally published for subscribers in the January 18, 2019, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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