Accountant Mark Goodfield (aka The Blunt Bean Counter) recently warned subscribers to The TaxLetter of some costly common investment mistakes and how to avoid them.
The duplication of investments is one of the most common investment mistakes people make. I believe the information below will help you understand the situation better.
A simple example is Bell Canada stock. You may own Bell in your own ‘play portfolio’, in a mutual fund you own, in your investment advisor’s private managed fund or indirectly, in an ETF. The same duplication often also occurs with many of the Canadian banks and larger cap Canadian stocks, such as TransCanada Pipeline, Thomson Reuters, Enbridge, etc.
Unless you are diligent, or your advisor monitors this duplication or triplication, you may have increased your risk/return trade-off by over-weighting in one or several stocks. Some may argue that this is really just a redundancy issue, but one that likely results in higher costs and is not really that significant a risk to your portfolio. Although, I would suggest that if the redundancy is in a more volatile group, such as the resource sector, the portfolio risk could be significant.
The investing reality in Canada is that there are only so many stocks in the Canadian stock universe that investment managers can select. This limitation plays a large part in this issue. Duplication can also result within a family unit. If your spouse or partner invests separately, they may be creating redundancies and additional costs, whereas if you invested as a family unit, much of this duplication could be eliminated.
I think most of us are aware of the concept of asset allocation, which is essentially allocating/diversifying an investment portfolio across major asset classes (stocks, fixed income, foreign stocks, small caps, REITs, etc.). Typically, effective asset allocation will also consider diversification across countries, which is important, given Canada’s limited stock access as discussed above.
Your asset allocation should be undertaken in the context of your Investment Policy Statement, which accounts for your risk tolerance, objectives and trading restraints (such as no stocks that sell arms or tobacco).
When you allocate and diversify your investments, you can typically, to some extent, minimize market risk and volatility. Where you have duplication, you are at cross-purposes with your asset-allocation strategy, since you have doubled or tripled up on an asset class. Your goal is diversification with minimal investment duplication.
Tax efficient investing in Canada
When I meet or talk with investment managers (the better ones do this on their own volition) on my client’s behalf, I always ensure they have reviewed the tax efficiency of my client’s portfolio. This would include considering the type of income earned, typically interest, dividends, capital gains, and would also likely account for their return on capital investments like REITs. This discussion is then tied back to whether an account is a registered account such as an RRSP, a tax-free account like a TFSA, or a taxable non-registered account.
Where there is duplication, this tax efficiency can be lost, especially where there are multiple advisors and there is no overall communication. This can be especially costly when tax-loss selling is undertaken in the fall, and your advisors are at cross-purposes or thinking they are doing good by selling stocks that are underwater. You may end up with an excess of capital losses or not enough capital losses, and they all sell the same stock to trigger a loss, even if it is a good long-term investment.
Some considerations to avoid duplication
If you use several investment managers, consider having one oversee the group to ensure each manager is investing in what they know best and there is minimal duplication and proper asset allocation. If you have significant wealth, you may want to hire an independent person to quarterback the process such as your accountant or a fee-for-service financial planner.
You may also want to consider consolidating your investment assets. This can be done by reducing the number of investment managers you use (if you have several) or, if you manage your own money, review the details of the funds and stocks you own and see if there is duplication of investments or a way to reduce your overall costs.
At the end of the day, your goal is to simplify the tracking of your investments, ensure you have managed your risk and have diversified your portfolio to minimize duplication.
This article provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisor.
This is an edited version of an article that was originally published for subscribers in the April 2018, issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.
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