Investment Strategy

A couple years ago I took a client of mine out for lunch. This fellow is one of the money managers for a mutual fund company that is small but has been quite successful over the past 5 years and as a result is now growing rapidly. I had some money to invest at the time and didn't really know what to do with it. Here is what he told me (as best I recall):

• No advisor who is any good touches a portfolio under $250,000. Most won't even take one under $500,000. And even then you won't get to talk to the actual guru, only to his/her assistant. Once you hit $1 million you will probably merit occasional phone conversations, but remember that you want him/her taking care of your money, not spending a tonne of time holding your hand.
• In light of this, while your portfolio is small it is best to use a discount brokerage and make your own investment decisions. You are probably as smart or smarter than the broker you would likely be assigned at a typical full service brokerage.
• Also, brokers are compensated in some very sneaky ways that may not lead them to make the recommendations that are in your best interest. You are probably better off steering clear until you can get the attention of a good one.
• My expert recommends mutual funds for a small investor who doesn't want to do a lot of work managing investments on a daily basis. He suggests globefund.com to find good reviews of Canadian mutual funds. Almost all the information on there is free.
• He likes the rating system on this site and recommends choosing funds 4 stars or 5 stars. Also, checking their history to ensure that they have been a 4+ star fund for a while and this rating is not a lucky quarter.
• He prefers smaller funds (under $500 million) on the reasoning that their good investment ideas are likely to have a bigger impact because they will have a smaller number of holdings. Of course, the same would hold true for their bad ideas, but you are hoping to choose a good money manager so you need to work on this assumption.
• He likes small cap stocks for their greater growth potential and suggested that someone as young as I am should be close to 100% equities with about half in small cap and half in large cap.
• At the time, he saw the Canadian dollar gaining strength against the Us dollar and recommended that I stay away from US equities as the rising loonie would erode any gains. (this turned out to be good advice)
• He recommended keeping the number of funds small - only one or two per asset class.
• The portfolio should be reviewed at least once a year, and the fund ratings checked again to see that you still have top perfomers in each class.

Based on his advice I bought 4 funds in March 2005. As of today, that portfolio is up 44% in just under 2 years. Really good. Best $20 I spent on lunch in a long time...