Sunday, January 14

Diversification vs. Simplicity in Investing

A couple of years ago I simplified my investments somewhat. I now have three investment accounts with 3 or 4 mutual funds held in each. This is still not as simple as it could be since in different accounts I have different funds representing the same asset class, but it's pretty manageable. Two of the accounts are registered accounts for retirement savings.

The third, much larger, account is held in my company's name. In a way, it is really for retirement savings too. Any money that I don't withdraw as salary each year from my company is accumulating in there for my later use. It does get taxed at the front, but only at the lower corporate tax rate. My accountant seems to think that this is more effective than withdrawing it, taking the tax hit now, and then putting the max into my RRSP. Her reasoning is that my salary and therefore tax rate is pretty low now, so the tax deduction for RRSP contributions won't be very generous. If I did make RRSP contributions now, then when it comes time that I retire I may be withdrawing greater amounts of money and basically moving this money from a lower tax rate (when I got the deduction) to a higher tax rate (when I withdraw it and pay tax on it). It seems plausible and I figure that if I'm paying her for her expertise then I'd better follow her advice unless I can prove she is wrong.

Anyway, my current dilemma is that I have put a chunk of cash into this corporate investment account and I now need to decide how to invest it. That account is by far the largest of my investment funds and it is overweight in small cap Canadian equities, reasonable in large cap Canadian equities and underweight in everything else. I think that I have almost decided to dump this latest money into a couple of international equity funds and perhaps pick up a little more large cap Canadian. That would bring my fund count from 4 to 7 but greatly improve asset allocation and diversification. I'm trying to not to stray too far from the simplicity mandate though so I feel like I need to be able to justify raising my fund count.