Tuesday, August 9, 2011

Do I feel lucky?

Dirty Harry's famous line can be said to more than just wrong doers looking down the barrel of Harry Callahan's Magnum .44. It's also a good warning to those looking to invest in mutual funds. Both situations are fraught-with-danger. This is not always clear to young, naive investors.

I had a chance to think about this this past weekend. I was at a family reunion and a young woman told me how she had just put aside some money in an RRSP. She was encouraged to buy a growth fund as she was in her thirties and needed to play financial catch-up, according to her adviser.

Now, I am not a financial adviser. I'm just a retired photographer. But, to the suggestion that she needed to buy a volatile growth fund, especially at this time in this market, I say: "Balderdash!"

The money had only been invested a few days and already the young investor was down in three digit, red territory. Yesterday may have doubled her losses. I'm sure she is feeling very uneasy about her investment right now. She wasn't told that what can grow can also shrink. She bought a growth fund because she was promised growth. Instead, she got instant shrinkage.

What's in a name? If it's "growth", it's a warning and not a promise. During the big downturn of 2008/2009 some growth funds lost 60 percent or more of their value. This not the scale of loss that young investors expect from a fund carrying the "growth" label.

So, what investment would I have suggested to the young woman? Answer: the TD Monthly Income Fund. Play with the calculator posted on the TD Asset Management website, as I did, and see what results when you punch in your own numbers.

For my example, I invested a hypothetical $15000 in the TD Monthly Income in January of 2008. I made no further contributions. I picked that date as it is before The Big Crash. I compared this investment to a similar investment of the same amount made at the same time and placed in the TD FundSmart Managed Aggressive Growth mutual fund. As you can see, aggressive growth translated into aggressive shrinkage.

Click or double click on the graph for an enlarged view.
FYI, my personal portfolio has earned better than 15 percent annually since I retired in January of 2009. That takes into consideration both The Big Crash and the recent global correction. I do not consider my portfolio to be growth oriented but rather it is centred on dividend producing investments.

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