Investment Strategy: investing a lump sum of new cash

When you have a new lump sum of cash to invest, such as a bonus or an inheritance, it can be tempting to look for new mutual funds rather than add to those you already own. That’s especially true if your portfolio has been on a losing streak.

Slow and steady may not win the race every time. But as an investment strategy, it often produces attractive long-term results. There are good reasons why.

A friend recently asked us to name two or three good Canadian equity funds. He had a lump sum of new money to add to his investment portfolio.

We complied without much thought to our friend’s overall picture. We named some funds we feel offer good prospects including Franklin Bissett Canadian Equity, Mawer Canadian Equity and Scotia Canadian Dividend Funds.

A bit later, our friend called again to discuss things in a little more detail. In fact, he holds about 12 mutual funds in his portfolio. It is a well diversified portfolio with a couple of sector funds and an excellent mix of Canadian and foreign equity funds. But we think he holds the maximum number of funds he should and wouldn’t recommend adding new names. The potential benefit of adding more funds simply doesn’t justify the administrative work or other potential problems.

Hot tip or strategic investment advice

Our friend expects to retire in about 15 years. And he holds a considerable portfolio of GICs. So he has sufficient time to hold some aggressive stock funds.

We sensed, however, he was, at least at first, fishing for the flavour of the month rather than looking for sound investment advice. Some of his sector and regional funds had suffered losses over the past year or so. And he wanted to add some winners to the mix.

With few exceptions, any portfolio of stock funds will suffer losses from time to time. And the diversified equity fund that increases its value year after year simply does not exist. This includes funds with strong, proven portfolio management—funds that excel when stock markets are friendly to their particular management style.

The value of dollar cost averaging

A program of adding regular amounts to a portfolio of funds means buying the same funds regardless of recent market activity. In other words, at different net asset values, both high and low. That provides you with the benefit of dollar cost averaging. With a regular amount of money, you buy more units when a fund’s value is low and fewer when it’s high. In the end, you’ll have bought at an average price that’s lower than the average net asset value over the time in question.

So we suggested our friend consider adding to funds he currently holds—including those that have lagged their peers lately. We had no reservation recommending he add to funds such as Franklin Bissett Canadian Equity and PH&N Canadian Equity that he already owns.

Adding to these funds won’t, of course, guarantee they’ll become category beaters soon or ever. But they’re well managed and find themselves in the position of lagging their peers lately. That will likely change. Now’s a chance to add to positions when they may be relatively cheap.


The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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