By Scott Ronalds

The last time we checked in with Emmylou (November 2013) we stressed that she needs to maintain realistic return expectations – her portfolio isn’t going to provide a double-digit return every year. She’s up 10% over the past 12 months (as of the end of October). Oops!

We spoke with Emmylou last week and reinforced that our message hasn’t changed. The markets have had a good run, despite the recent turbulence, and both stock and bond valuations aren’t as compelling (bonds in particular). That’s not to say the good times can’t continue, but we’d rather be positioned for a weaker market. We explained to her how our cautious stance is reflected in the positioning of the Founders Fund – less stocks, less bonds and more cash than normal.

The numbers, however, weren’t the reason for Emmylou’s call. Her father passed away in the summer and she received an inheritance of $190,000. She has mixed feelings about what to do with the money and wanted to use us as a sounding board.

Emmylou’s dad lived a modest lifestyle and saved diligently, and she wants to make sure she does the right thing with his hard-earned money. She’s worried that now might not be a good time to invest a good chunk of money in the market. She also wants to pay off debt and give some money to her daughter.

Her thinking is as follows:

  • Pay off all her debt, which is $55,000 in total ($40,000 on her mortgage and $15,000 on her line of credit). This is one of her key financial goals.
  • Give $25,000 to her daughter (to help her buy a home in Toronto).
  • Invest the balance ($110,000).

She feels strongly about paying off her debt, even though interest rates are extremely low and her servicing costs are manageable. And she noted that the gift to her daughter would make her feel better than anything she could buy for herself. We suggested that there’s nothing wrong with her reasoning and she should go ahead with both.

The bigger issue is what to do with the remaining $110,000. Emmylou doesn’t have any big expenses coming up and doesn’t foresee any short-term needs for the money. She still earns a good salary and enjoys her job. Emmylou has $40,000 in RSP contribution room and $11,000 in TFSA room. Her preference is to max out both accounts.

We advised Emmylou that maxing out her TFSA is a no-brainer. She views the account as part of her long-term investment plan and we recommended she should invest the $11,000 according to her Strategic Asset Mix (accomplished through the Founders Fund). We also suggested that maxing out her RSP is prudent, as she’s still in a high tax bracket and will receive a nice tax refund. Again, there’s no reason to veer from her mix as this is long-term money. She agreed that this made sense and invested the money in the Founders Fund in both accounts.

As for the balance ($59,000), Emmylou has mixed feelings. Although she views it as long-term money, she feels differently about it because it won’t be part of her registered plans, and she’s a little hesitant to put it to work in the markets given our cautious outlook and the recent volatility. She’s wondering if she should sit in cash and wait for a better entry point.

We explained that the danger of this is nobody knows what the markets are going to do in the short term, and trying to time an entry point will be difficult and stressful. She could end up sitting on the sidelines for a prolonged period and miss out on further gains. We also noted that one of the reasons the Founders Fund is holding a fair amount of cash (15%) is to have some “dry powder” available if we (and our managers) see an opportunity.

We emphasized that new money doesn’t require a new plan, as long as nothing has changed with her investment objectives or time horizon. We recommended, therefore, that she invest the money in the Founders Fund. We suggested, however, that she wait until after the year-end fund distributions are paid in mid-December so that she doesn’t receive the distribution and its related tax implications on the new money being invested. We suggested she invest the money in the Savings Fund now (to earn some interest in the interim) and switch it into the Founders Fund after the distribution is paid.

Emmylou appreciated the sounding board. She decided to hold back $15,000 to pad her emergency fund, and invested $44,000 in the Savings Fund (in her investment account) with the intention to move it into the Founders Fund after the distribution is paid.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.