THE END OF A SERIES AND THE BEGINNING OF A JOURNEY

Upon addressing, debating and resolving the aforementioned topics and issues, the portfolio building process will be com­plete. Investment policy has been developed, macro- and micro- expectational factors relevant to investing have been identified, portfolio composition has been decided, and assets have been allocated and optimized. This is where your real financial jour­ney begins.

As I approach the end of an odyssey that began almost a year ago in the May, 1999 issue of this journal, I again ponder whether I have done the right thing by delving into a practical step by step description of the IMC process.

To address the question about why I specifically chose not to write about current events and more topical issues of interest, my answer is as follows. In my tenure as an investment advisor, I have seen this profession attract some of the most successful sales professionals in the country and, among them, some of the most gifted raconteurs I have had the pleasure ofmeeting. Some of these individuals are far more gifted than myself at relaying current topical events, which would make for superior light reading. I can truly say, though, that most investors I have had the pleasure of dealing with stood to benefit from additional awareness of factual research, education and planning. Armed with the fundamentals of the IMC process, investors can be in a more empowered state of financial awareness, more capable of making the critical decisions necessary to nurture and maintain a successful portfolio. There is plenty of financial gossip, fruit­less speculation and conjecture available to bemuse and bewil­der the most avid ‘hot tip’ collector. It will serve no one to have me adding more fuel to that glowing fire.

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Dollar cost averaging versus lump sum investing: Once money managers have been selected, either in the form of mu­tual fund managers or professional managers to whom you give discretionary power to make the day to day decisions in your in­vestment accounts, the final decisions to be made are about the timing of the actual placement of cash into the fund or man­aged account.

Two options you need to choose between are ‘dollar cost- averaging’ and ‘lump sum investing’. When cost and perform­ance of these approaches are evaluated, neither has been shown to be consistently preferable over the other.

‘Dollar cost averaging’ is the process of making multiple de­posits of equal size at regular intervals over a specified period of time. This results in acquiring a particular type of asset slowly, which can decrease the risks of a sudden market downturn. Dol­lar cost averaging can be particularly useful when markets are unstable.

For the individual investor, cost averaging strategies are sometimes more feasible for purchasing mutual funds than for placement of money in separately managed accounts. As dis­cussed previously in this article, in order to access the services of separate account managers, it is not unusual to have to meet a minimum initial account size requirement of $100 thousand to $1 million per mandate or manager.

‘Lump sum investing’ is exactly what you would expect – investing all the money intended, as specified in the asset allo­cation determined in the second step of the IMC process, over days or weeks. Some believe that this approach is preferable to dollar cost averaging, which is seen by proponents of lump sum investing as attempts at market timing; they argue that short – term market fluctuations have a negligible effect on the portfo­lio’s performance over the long term. As well, advocates of lump sum investing suggest that delays in getting into the mar­ket expose the investor to the risk of lost opportunity. Market timing versus strategic asset allocation: Fiduciaries, individual investors and investment consultants usually have quite different opinions on most investment management sub­jects. However, the subject of market timing is not one those subjects.

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On the other hand, a large influx of cash from new investors may force the same manager to invest even when the markets are soft to prevent a larger cash position from pulling down the overall performance of the portfolio.

Diversification: Most equity mutual funds hold 80 to 120 dif­ferent securities. In a separately managed stock portfolio, the number of securities is usually half that amount. For an investor who is comfortable with a bit more performance volatility in anticipation of greater returns, the more concentrated portfolio with fewer securities may be appropriate.

Tax deductibility of management fees: The management ex­penses and transaction costs incurred within a mutual fund can­not be deducted as an investment expense by the individual investor. These expenses are accounted for in calculating the net asset value of the fund. However, outside of a registered re­tirement savings plan (RRSP), individuals can claim the fees paid to a money manager of a separately managed account as part of their miscellaneous investment expense deductions. Brokerage expenses: Mutual fund expense ratios, often referred to as management expense ratios, do not include the brokerage costs incurred to buy and sell securities in and out of the fund, nor do they include custodial fees charged by the trust company who acts as custodian of the fund. It is not uncommon for a mu­tual fund to generate significant transaction costs by turning over an entire portfolio frequently. In addition, the trading ac­tivity from ongoing new contributions and redemptions adds to brokerage expenses. All things considered, the total costs shouldered by investors in any given mutual fund can be very similar to those of a separately managed account. Shareholder information provided: Investors with separately managed accounts receive annual and quarterly reports from the companies in which they hold shares unless they opt not to. This is appealing to investors who want to understand the stock analysis and selection process followed by the money manager to whom they have delegated their buy and sell decisions.

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