Seth and Naomi were once much more fearless investors than they are today. But several missteps over the last decade have made them wary of taking on risk.
"We are conservative investors due to the 2008 crash and having invested and lost $10,000 in the Crocus Investment Fund," says Naomi, in her early 50s and living off a disability pension.
It also didn't help the couple were convinced almost a decade ago to take the commuted value of Seth's defined-benefit pension plan from a previous employer and invest it in mutual funds, with disappointing results.
"Our accountant said that was a bad move afterwards," she says.
Despite conservative inclinations, the couple still has significant stock-market exposure. Of the more than $200,000 in their RRSPs, about 64 per cent is invested in equity mutual funds. All told, the couple has more than $367,000 in investments and cash, including $15,000 of MTS stock and $60,000 in a high-interest savings account.
"We're not sure what to do with that money," Naomi says, referring to the $60,000 in savings.
While they worry about being burned again, they also realize they can't settle on the low returns from savings.
"I feel we're really losing money because of the cost-of-living increases," Naomi says, adding they find it difficult to balance their budget with three children finishing high school or attending university.
Often helping the kids with Autopac, gasoline and other costs, the couple worries their plan for Seth to retire in five years at 60 is unrealistic.
Although he will receive a monthly benefit of about $2,600, it is far short of the $3,414 he earns now, so they know their investments will make up a large part of the retirement picture.
But they worry about where to turn for help.
"We're not entirely satisfied with the places we've been dealing with so we'd like some different advice."
Senior wealth adviser with ScotiaMcLeod Brent Hardman is a portfolio manager and financial planner, providing fee-only advice for some clients while managing investments on behalf of other clients for an annual fee.
Hardman says Seth and Naomi should do fine in if he retires at 60, providing they can keep their expenses in check beforehand, contribute to their TFSAs and invest in a conservative portfolio of GICs, bonds and dividend-yielding stocks.
To that end, their current portfolio could use some work because it could be structured better to manage market risk while providing a better return on their money. The couple presently owns 13 mutual funds that have had an average return of about 3.2 per cent over the last three years. While positive, the return has barely outpaced inflation, and after taxes, they're hardly coming out ahead. This lacklustre performance is in part a reflection of geography. About 60 per cent of their mutual funds are invested in Canada, and the TSX has struggled since 2010. In contrast, less than 10 per cent of their assets are invested in the U.S. stock markets, which have hit record highs.
A more diversified portfolio would involve less exposure to Canada and more investment in other markets such as the U.S, which would also help eliminate another problem with their portfolio: investment overlap.
"Due to the number of funds they own, there is a great deal of overlap in the holdings," Hardman says. "For example, 10 out of 13 funds are holding Royal Bank, Scotia Bank, and TD."
In fact, more than 50 per cent of their portfolio is invested in the financial sector.
"Since most funds they own are buying the same investments, they are all positively correlated to one another, meaning they move together during all phases of the market cycle," he says. "If the markets are dropping, all of their funds will drop at the same time."
A more diversified strategy would spread their money into assets that are negatively correlated to one another, reducing the impact of falling markets.
"They could diversify to include stocks in other sectors with good dividends, such as utilities, consumer and health care."
Seth and Naomi also should consider the risk associated with owning MTS stock, representing about five per cent of their portfolio.
"There has been some negative sentiment as of late as the $520-million sale of Allstream to a foreign buyer was blocked," he says. "With that, some analysts feel there is insufficient cash flow to maintain the current dividend and fund pension obligations."
Another area of concern is the fees they're paying on their portfolio. The average management expense ratio is 2.4 per cent, and Seth and Naomi could pay substantially less because they have enough investible assets -- more than $250,000 -- to hire a professional money manager.
"Considering their largest holdings are banks and other well-known companies, they would be better off in a separately managed account with an annual management fee of 1.5 per cent," he says. "This would allow them to own the stocks directly, and avoid paying trading commissions."
A major benefit of this level of investment advice is a manager has discretionary authority to manage the portfolio on their behalf and has a fiduciary duty -- a legal obligation -- to act in their best interest.
A portfolio manager could also build them a portfolio of equities and fixed income that would provide them with a middle-of-the-road strategy needed to get them to their goal. The equity portion could be made up of blue-chip stock, companies that have long histories of sustainable, increasing dividends.
"I would recommend the dividends be reinvested to buy more shares of the stock, as many companies offer dividend reinvestment programs (DRIPs)."
Of course, they will also need a fixed-income component and a laddered bond or GIC strategy might be a good fit for them.
"Bonds and GICs with laddered maturity dates provide income and wealth preservation, if this is part of their investing goal, while removing the guesswork of where interest rates are headed."
A GIC ladder strategy, for example, involves buying GICs with maturities from one to five years. Each year a GIC expires, and the money is either used for expenses or reinvested in another five-year GIC.
The main thrust of Hardman's message is Seth and Naomi do not need an aggressive investment strategy to achieve better long-term results than current savings rates.
Based on a conservative annual return of four per cent, they can expect a retirement income of about 70 per cent of their current earnings, Hardman says.
That should be enough for Seth and Naomi to enjoy a comfortable retirement with enough income to afford "helping their kids with wedding expenses and the occasional vacation."
But this plan does have a catch. Seth and Naomi need to mind their spending on the kids before retirement.
Or they will have to make do on a little less later on down the road.