So... why do we invest?

For our retirement? For our children? To improve our lives? To improve the world?

Investing Basics

Ethical Investment SeminarEngineers Without Borders

Ottawa Professional Chapter15 February 2009

Selected topics

Types of investments

Tax-free savings account (TFSA)

Cost of owning mutual funds (w/ ethical fund example)

Rate of return on mutual funds

Cost of buying stock and choosing a stock broker

Index investing

Asset allocation

Modern Portfolio Theory

ETFs

The 'lazy' portfolio

Ways to grow your investment

Interest: GIC's, bonds, savings acc'ts, term deposits

Citizen's bank Shared World Term Depositmicroplace.com, kiva.org, etc..Growth: stocks, ethical mutual funds

Tax Free Savings Account

$5000 contribution room every year to all over 18 (ie, not dependent on income!), carried forward indefinitelyYou never lose contribution room even when withdrawnCan withdraw at any time with no tax, and without affecting government benefitsYou can give money to your spouse that they can contribute to TFSA (they get the income)

Strengths of the TFSA

Investment grows tax-free (simple as that)'it's only 5K'.. but 5K/year plus growth/compound interest is significantHouse savingsRainy-day/emergency cash on handA little extra retirement savings/dividend income that won't cause 'clawbacks', esp. for high-income retirees

Retirement: TFSA vs. RRSP

TFSA

RRSP

It all depends on your tax rates now vs. in retirement

Cost of owning a fundCalvert Capital Accumulation A

Loads

Back- and front-end loads

Sales commissions applied to the entire principal amount (front-end) or entire final amount (back-end, or deferred load)

Management expense ratio (MER)

Management expense ratio

Expense ratio generally between 0.25 – 2.5 percent of the return on investmentCalculated daily, paid to fund company monthly (you won't even see it)Fund managers must report their returns after deduction of MER in the prospectusBut, hampers growth as they pay themselves first.. (even if fund has negative returns)

Calculating return

Rate of return: ratio of the amount gained or lost to the amount invested For 1 year return: (final-initial)/initial = (final/initial) - 1

eg. ($97.8/$111.19) - 1 = -12.0 %But what does annualized mean?

Annualized return

Analogous to km/hr, rates of return are measured in percent/year.For periods more than one year, we use 'annualized return' (analogous to average speed)But we must use a 'geometric average' instead of an 'arithmetic average', due to compounding(final/initial)^(1/n)-1, where n is the number of years

eg. ($113.49/$111.19)^(1/3) - 1= 0.0070.7% annualized return over 3 years

Fund comparison

Compare your fund with a benchmark such as the S&P 500 to assess performance'S&P 500': Market capitalization weighted price index composed of 500 widely held common stocksFunds with high MER will have a hard time beating the indexBut remember, to calculate your real-life return on investment, include loads, commissions (for stock) and brokerage account fees!

Costs of buying stock

Apart from the annual cost of having the account, each buy order and sell order incurs a commission

Stock brokers

Full service

provide personal contact and advicerelatively expensiveDiscount

little to no personal advicecheaper per tradeOnline

generally takes the discount model to the extremee.g. E*TRADE

Index investing

Funds which track the average performance of an index, or a collection of securities (eg S&P 500)A school of thought: your portfolio should consist of mostly no-load index funds20-year study, ending 12/31/2001, average actively-managed fund underperformed the S&P 500 by 2%66-75% of managed funds are worse than index“A random walk down Wall Street”, Burton Malkiel“Common sense on mutual funds”, John Bogle

Example of 8 Random Walks

Asset Allocation

All securities can be characterized by two features: risk and returnFrom: Investopedia.com, Achieving optimal asset allocation, by Shauna

Carthner:

Asset Allocation

The longer you hold a portfolio of stocks, the less volatile your return

Asset Allocation

Modern Portfolio Theory

Saw that more risk = more return

A portfolio of risky (volatile) stocks may be put together in such a way that the portfolio as a whole is less risky than any individual stock

How many stocks is enough to diversify out most of the risk? .. 20, 100?

Somewhat at odds with the tenets of ethical investing, as screening out classes of companies reduces our diversification options

Exchange-traded funds (ETFs)

Canadians do not have access as many low-MER funds as Americans doIndex ETFs have lower MERs than fundsCan buy US ETFs: foreign equity can now be held in any amount in RRSPExample ethical ETFs:iShares KLD 400 Social Index Fund (KLD)Canadian Jantzi Social Index Fund (XEN-TSX)

Lazy portfolio

Term coined by MarketWatch analyst Paul Farrell

A portfolio made entirely of index funds: bonds (low-risk), equities at home, equities abroad

Maintenance: periodic rebalancing to maintain proportionality

Example:

My lazy RRSP portfolio

23% ca. bond ETF

17% ca. index fund

19% euro index ETF

6 % international index ETF

31% US equity index ETF

4 % emerging markets ETF

What Type of Ethical Investor Are You? (break with workbook)

The Four Spokes of Ethical Investing Avoidance Screening Affirmative Screening Community Investing Stakeholder Activism