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Choice – Flexibility – Control

As an investor who has accumulated wealth, you may ask, why should I invest in investment funds over choosing individual stocks? You may think the transactional costs associated with managing individual stocks are more effective than paying the fees of a professional money manager. You may also believe owning individual securities gives you greater choice, flexibility and control. As an investor, you want to grow wealth and reduce risk to ensure you achieve your long-term financial goals. Consider some of the differences and opportunities of investment funds compared to individual securities.

Investment funds – how do they provide value?

1. The benefits of professional management

The portfolio management process is a continuous approach to design your investment plan that sets investment objectives, develops and implements an asset mix, monitors the economy and markets, adjusts the portfolio and measures performance. Investment funds provide diversification within asset classes. While you could structure a balanced portfolio on your own by purchasing shares, this approach can require your full-time attention. Professional investment managers may turn over 65 per cent of the assets in a portfolio in any given year. This means purchase and sell decisions in a portfolio could be made on 65 of 100 stocks of equal value. Does your broker devote enough time and resources for the management of your securities portfolio?

Qualified and experienced individuals or groups continuously monitor investment funds. They have access to internal and external research and resources unavailable to most individual investors and they expertly monitor economic conditions to determine their effect on a fund’s holdings. Money managers incorporate virtually all available information about capital markets into the decision-making process. This material includes expected activities in the national and international private and public sectors, government policies, corporate earnings, economic analysis, existing market conditions and forecasters’ interpretations of the data. Managers of public companies also want to ensure investment managers who control significant amounts of capital understand their business plan and market position.

As an investor who has accumulated wealth, you may ask, why should I invest in investment funds over choosing individual stocks? You may think the transactional costs associated with managing individual stocks are more effective than paying the fees of a professional money manager. You may also want to ensure investment managers who control significant amounts of capital understand their business plan and market position. These experienced professionals make educated investment decisions and work to pursue the fund’s objectives in the best interest of every unit holder.

2. Accessibility

Investment funds give you access to global markets and provide the opportunity to participate in almost any asset class around the world. The average investor would find it difficult to access certain foreign exchanges and certain funds on their own. For example, real estate funds provide access to a diversified portfolio of real property. They hold billions of dollars’ worth of real estate in commercial, industrial and residential properties. The average investor simply cannot reap the rewards of these types of products.

Also, many investors do not have access to certain types of bonds as the purchase amount minimums could be prohibitive. You can purchase some bonds in blocks for as little as $1,000, but to create a diversified portfolio of bonds ranging in type (government, global, provincial and corporate) and durations, you need a very sizeable account. Professionally managed portfolios invest in at least 25 distinct holdings of various weightings to construct a diversified portfolio.

3. Liquidity

One key to consider when selling individual stock is price and commission. Selling securities requires a buyer. Selling investment funds means units are bought back by the issuer. Most investment funds can be sold at any time to provide access to your money. You have the option to set up an automatic monthly transfer from one or more investment funds. You can’t always sell your bonds without loss or penalty, and in some cases, they must be held until maturity. With an investment fund, you liquidate when you choose.

4. Diversification

If your goal is to grow and protect your wealth, few investment options can provide the level of diversification of investment funds. Investment experts recommend investors hold at least 30 to 40 different stocks in a well-diversified portfolio.* Investment funds typically invest in at least this amount of securities. Investors must also consider the need to invest in markets across the globe for the maximum amount of diversification. Investment funds also provide easy access to foreign markets. With a mutual fund or segregated fund, you can tap into foreign markets across the globe at a fraction of the cost of owning individual foreign securities.

* Meir Statman, “How Many Stocks Make a Diversified Portfolio?” Journal of Financial and Quantitative Analysis 22, no. 3 (September 1987): 353-363

5. Convenience

Investment funds offer many conveniences not possible through owning individual stock. With a mutual fund, you are able to easily customize your portfolio as your needs change. For investors drawing an income, there is no need to worry about how withdrawals will affect individual security holdings. Portfolio managers continually monitor the amount of cash available for withdrawals and the remaining amount is invested in securities. Tax reporting is simplified and saves you time with consolidated tax slips.

A question of control

You may want to maintain control over each investment decision by owning individual stocks. After all, control over your finances has brought you to where you are today. But have you considered the time needed to maintain a balanced portfolio and conduct appropriate research?

What about the limits placed on your access to certain funds and markets as well as the costs associated with individual transactions? You may find the responsibility of this control too costly in terms of time as well as fees. With investment funds, you benefit from professional guidance while you maintain control of the big investment decisions.

Holding individual securities

Often people pick stocks based on hot companies or tips. Yet strategic portfolio management stresses selecting securities based on their contribution to the portfolio as a whole. The interactions among the securities contribute to the overall success of the portfolio. It’s important to consider how different asset classes perform with each other, to select a combination so each generates returns in different types of markets. The return on a portfolio is the average returns of the securities it holds. The portfolio approach is more strategic than a series of uncoordinated decisions.

Make your investment decisions wisely. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

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