Is a pre-packaged portfolio right for you?

There are certain basic rules of investing that apply to everyone this RRSP season. If you want to make money over the long term the golden rule is to diversify.

Not many of us can predict precisely if a fund or stock will go up in value, but we can pick as many good investments as possible and hope most go up, while a few will likely go down. It’s a strategy that has been proven to open investors up to opportunities while limiting downside risk. It’s the difference between investing and gambling.

Pre-packaged portfolios

How to diversify is another question and that’s why most financial institutions offer pre-packaged portfolios, also known as managed portfolios. They’re aimed at investors who have a mish-mash of mutual funds or bonds in their registered retirement savings plans, or for those just getting started.

You can lower your 2012 tax bill by contributing a lump sum to a pre-packaged portfolio inside an RRSP before the March 1 deadline, but another way to lower risk is by contributing through regular monthly payments. Regular payments help level out market fluctuations. Automatic payments are also a disciplined way to invest. After a while you learn to live with the deductions - like taxes.

Three sizes might not fit all

The downside to pre-packaged portfolios is their inability to adapt to an individual’s risk tolerance and goals of the individual. To address that problem, many financial institutions offer a series of portfolio’s ranging from conservative to aggressive.

A typical “aggressive” investor would be someone who is young and has what is termed a long time horizon – the span between the present and when the investor needs to start withdrawing the money in retirement. Investing aggressively opens up opportunity for bigger gains through riskier investments, and having a long time horizon provides plenty of time for recovery if things don’t go well.

A typical “conservative” investor is someone with a short time horizon who will need to withdraw funds sooner. Playing it safe decreases the potential for bigger gains and that’s why it’s important to start investing early in life.

Each portfolio should hold mutual funds that cover the basic asset classes - bonds, Canadian equities, U.S. equities and international equities. In some cases one fund will cover more than one asset class such as a global equity fund that includes international and U.S. equities.

Convenience comes at a price

Pre-packaged portfolios are monitored on a regular basis by a financial advisor who works with you through the years, and adjusted by professional managers to reflect changing market conditions.

All this convenience comes at a price. Annual fees typically range from 1.5 per cent to 2.5 per cent of the total amount invested. Part of that fee goes to the fund manager and part to the financial advisor for ongoing advice. As your nest egg grows, the fees grow, so it’s important to keep an eye on what you’re paying. Having more money gives you more leverage to negotiated fees.

Try to avoid back end loads, or fees imposed if you decide to sell any funds in your pre-packaged portfolio. There can be many hidden fees so be sure to ask.

Shop around

The convenience of a pre-packaged portfolio is offset by a lack of options. Most only hold mutual funds offered by one company. Check the performance record of the funds.

To find a pre-packaged portfolio that’s right for you start with the investment arm of your bank. Having all your financial services under one umbrella (investing, banking, mortgage) is convenient and can give you more negotiating power over fees.

But be sure to shop around. The Internet is loaded with options.