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Choose the appropriate investment structure to reach goals

Choose the appropriate investment structure to reach goals

June 13, 2013

mutal funds, stocks, bondsInvestors often feel detached from their mutual fund investments because they do not see what they own within the fund.

Purchasing specific securities (stocks and bonds), however, allow investors to know the names of their investments. They can relate to Apple, Ford and the Royal Bank. The investments’ company names are on client statements. Monitoring the changing nature of securities is easy. Investors can also speak with their advisor about whether to hold, buy or sell a specific security.

With one simple mutual fund investment, you own a basket of different securities. A professional manager is responsible for managing the fund and making buy and sell decisions. However, mutual funds are not that transparent. Investors often do not know the specifics of what they own.

Fund companies do publish their holdings at regular intervals, but that is a backward looking snapshot. It is quite possible the fund would have some different holdings at the time of your purchase.

A mutual fund might actually own Apple, Ford and the Royal Bank, but investors will not see those names on their investment statements; nor will they have a say in what stocks are bought or sold or the timing of those decisions. You are effectively delegating that investment selection decision to the mutual fund manager.

The emotional connection between stocks and mutual funds is different. Owning stocks is more relatable. You can visualize or sometimes experience the product. Relationships with mutual funds are more disconnected because most of us are unaware of the ever changing basket of securities.

Some prefer the hands on experience of purchasing and following specific stocks the way hockey fans choose their favourite team to follow. You might cheer for the Toronto Maple Leafs while at the same time be happy to see the Vancouver Canucks exit postseason play with such high expectations of contending for the Stanley Cup this year.

There is a competitive aspect to investing as there is in sports. Every investor has a preference regardless of the pros and cons of these two options. They ultimately choose from one of the two or a combination of both.

A segregated portfolio is another investment structure option that combines an investor’s direct ownership with a professionally managed portfolio. The investor owns specific securities at the discretion of a professional manager.

Once this decision is made and having considered the various types of stocks and bonds, whether to hold them in Canada or diversify around the world needs to be determined.

So repeating the above example, you may own Apple, Ford and the Royal Bank. Those stocks would have been purchased on your behalf by a professional manager based on your investment objectives and required return. They would be itemized on your investment statements.

This is the time to evaluate the direct ownership of securities, mutual funds or any other investment structure and decide how to implement your investment strategy.

Your personal preference on how to invest will be a combination of what you need and what you prefer. Like any other decision you are encouraged to select the investment strategy that is most likely to help you achieve your objectives.