# Changing investment strategy



## 14dmoney (Jan 20, 2011)

We have accumulated a decent nest egg but our portfolio consists entirely of high MER mutual funds (average cost approx 2.5% while getting no advice/ bad advice from our current advisor). 

Our current asset mix is:
15% cash
5% bonds
5% US equity
25% Foreign equity
50% Canadian equity

Because we are thinking of semi-retiring in less than 5 yrs, we need to decrease our risk and volatility. 

The new proposed asset mix would be:
5% cash
30% bonds
15% US equity
15% Foreign equity
35% Canadian equity

Going forward, I would also like to decrease our costs so here's what I am thinking:

1. buy ETF's and low MER bond funds (30%)
2. buy ETF's and low MER Cdn equity, US equity,and Int equity funds (30%)
3. build a core portfolio of blue chip Canadian and US diividend stocks (30%) 
4. build a small portfolio of growth at a reasonable price stocks (10%)

Here are my questions:

1. Is this a bad time to be increasing our fixed income allocation since interest rates will be going up and yields will be going down? or do we bite the bullet and do it to decrease our risks/costs?

2. Do we wait to sell our resource funds which are currently producing high returns? or do we just bite the bullet and do it to decrease our risks/costs?

3. Alternatively, do we wait to sell our emerging market funds which have dipped 10-15% YTD? or do we just bite the bullet and do it to decrease our risks/costs?

Does anyone have a problem with paying a fee based advisor to help us? Any other thoughts about this proposed change in strategy?

Thanks in advance for any advice or suggestions!


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## the-royal-mail (Dec 11, 2009)

Welcome to the forum!

You may not need a fee-based advisor if you are not in an immediate rush and are willing to spend some time here at CMF reading threads and participating in discussions.

I am not sure which specific funds you have, but it is never a bad idea to replace poor performers with better performers after a period of sustained decreases like what you mention above.

What I don't agree with is reducing cdn equity and increasing bonds. The consensus lately seems to be that bonds are a bad area to be going into at this time. As far as Cdn equity, that is actually one of the best funds I have and I have a low-fee index fund for that portion of my portfolio. For this portion, perhaps you could consolidate into a cdn index fund?

I also think you should NOT reduce your cash. Keep the 15% cash.

Your portfolio actually looks pretty good to me, other than the poor performers you mentioned. 

That will be $400 please.


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## Four Pillars (Apr 5, 2009)

14dmoney said:


> Does anyone have a problem with paying a fee based advisor to help us?


I'm a bit short this month - maybe you should pay for your own advisor?


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## kcowan (Jul 1, 2010)

I would like to know why you plan to reduce your cash from 15% to 5% while decreasing you equity from 80% to 65%? What does semi-retirement mean to you? Will you be relying on income from your portfolio? For how long or when?


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## Sampson (Apr 3, 2009)

the-royal-mail said:


> I am not sure which specific funds you have, but it is never a bad idea to replace poor performers with better performers after a period of sustained decreases like what you mention above.


I completely disagree with this advice.

This is chasing performance not using asset allocation to obtain portfolio diversification.

If your energy/CDN holdings are performing well, and emerging market holdings are doing poorly, you are likely overweight the former and underweight the latter.

If this is the case, you best ought to rebalance your portfolio in line to your asset allocation described above. This means selling your winners and buying more of the losers.


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## Sampson (Apr 3, 2009)

14dmoney said:


> We have accumulated a decent nest egg but our portfolio consists entirely of high MER mutual funds (average cost approx 2.5% while getting no advice/ bad advice from our current advisor).


Your post sounds like you want 2 different things, (1) lower fees, and (2) eventually you want to change your portfolio completely.

Objective (1) is easy and doesn't require any market timing or shifting of assets to other types of holdings.

All you have to do is sell your existing high MER mutual funds, then buy an equivalent ETF. Easy, very little risk of the value of your assets changing (assuming the ETF mirrors the mutual fund strategy). You simply pay transaction costs, but these should be recovered very quickly assuming large portfolio size.

Objective (2) is a different story. I assume you are looking to the dividend paying companies for income, but is this strategy sustainable for your needs? and will your new portfolio will outperform the previous one?

Venturing down this second change will be much more difficult and involving rotating your assets through different classes. This could be a big hit or miss, i.e. you'll be timing the buying and selling into the different holdings. Tread carefully.


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## 14dmoney (Jan 20, 2011)

the-royal-mail said:


> Welcome to the forum!
> 
> You may not need a fee-based advisor if you are not in an immediate rush and are willing to spend some time here at CMF reading threads and participating in discussions.
> 
> ...


Hi t-r-m,

Well, for example, Excel India was an emerging market fund that we bought when it first started. I have been reading that there is a bubble along with high inflation/central banking concerns so I thought it was time to exit in December, but alas, could not convince my better half to sell. He is a buy and hold investor which served us well in the 2003 and 2008. 

We also have a lot of exposure to the energy/resource sector (CIBC Energy, TD Energy, Trimark Resources). I can't help but think we should take some profits. However, we are still licking our wounds after our advisor thought selling RBC Global Resources to capture a capital loss in November was a good idea. (I had asked our advisor in November to help us achieve the goals I had listed earlier and this is one of several recommendations that didn't particularly serve us well... Good news is it motivated me to start reading books from the library and learning from the impressive wealth of knowledge and information here on CMF).

The increase in bonds was in my RRSP account as I was going to sell off some mediocre Canadian equity house funds (MD Bond and MD Dividend). I was thinking PH&N and XSB would be a better buffer if stocks take a dip later this year. However, I may just reconsider and consolidate it into Canadian balanced funds instead like CI Signature Income and Steadyhand Income. But then I am worried that I have over 90% of my portfolio in equities so would corporate bonds and high yield bonds be a better alternative?

Actually, just putting this response in writing is making me feel soooo much better about going ahead and taking action that $400 seems like a bargain!


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## 14dmoney (Jan 20, 2011)

kcowan said:


> I would like to know why you plan to reduce your cash from 15% to 5% while decreasing you equity from 80% to 65%? What does semi-retirement mean to you? Will you be relying on income from your portfolio? For how long or when?


We actually started out with a 30% cash position in November and I was bummed out that we didn't really deploy as much as I would have liked during the recent rally. I bought one stock, WMT, and then realized I was waaaaay out of my comfort zone.

Semi-retirement means that we will work to have enough income for living expenses... ie. our investments will continue to grow (hopefully!) but we will no longer be saving to contribute to the portfolio.


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## 14dmoney (Jan 20, 2011)

Sampson said:


> I completely disagree with this advice.
> 
> This is chasing performance not using asset allocation to obtain portfolio diversification.
> 
> ...


Actually, we are probably overweight in our global equities as we also own TD Latin America and Mackenzie Cundill Value. I am thinking of switching these funds out to iShares Latin America and Mawer World Investments.

My question is: should we dump our Excel India (MER 2.98%) or should we ride it out since it has already taken such a big hit? ie. Avoid sellling low like we did with RBC Global Energy? 




Sampson said:


> Your post sounds like you want 2 different things, (1) lower fees, and (2) eventually you want to change your portfolio completely.
> 
> Objective (1) is easy and doesn't require any market timing or shifting of assets to other types of holdings.
> 
> ...


I agree objective (1) feels somewhat more straightforward than objective (2). I fully recognize that the new portfolio will have lower returns but I am shifting my focus from primarily growth to capital preservation with some growth. Will my proposed strategy accomplish this?


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## 14dmoney (Jan 20, 2011)

four pillars said:


> i'm a bit short this month - maybe you should pay for your own advisor?


lol!


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## warp (Sep 4, 2010)

Get out of those high MER funds as soon as possible.

Make sure first that they are Not DSC funds.....as that will cost you penalties to get out, and you will ahve to weigh all that in your thinking.

Any low cost ETF portfolio would prob beat those funds over anay time frame.

Decide on your asseet allocation and try to stick with it.
( bonds are a little scary right due, due to higher rates prob coming)

good luck


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## 14dmoney (Jan 20, 2011)

warp said:


> Get out of those high MER funds as soon as possible.
> 
> Make sure first that they are Not DSC funds.....as that will cost you penalties to get out, and you will ahve to weigh all that in your thinking.
> 
> ...


Thanks, warp. I am feeling better about taking action now. I had read somewhere that your investments are like a bar of soap: "everytime you touch your portfolio, it will get smaller". We already lost a substantial chunk when we followed our advisor's recommendations for rebalancing our portfolio in November (...yes, the asset allocation in my original post was after seeking expert financial help!)

When we first started investing, we did buy some DSC funds but we were able to hold on to them despite their underperformance and sell them without penalty... live and learn....

I am a little worried about ETF's as we had a bad experience with the first ETF that we bought in November based on our advisor's recommendation (am I sounding bitter yet?) We paid a premium market price and there was a considerable bid-ask spread as well as a significant tracking error with this ETF. We will need to absorb the cost of that poorly executed transaction when we sell so now I figure we are looking at a much higher expense ratio than a low MER fund. 

So here's two more questions: 

1. Should we stick to what we know best rather than make costly errors like this? (we only learned about these differences between ETF's and mutual funds after we bought since we assumed our advisor knew what he was doing... but apparently not... yes, I now know what due diligence means...)

2. Would it be OK to pay slightly more for say, a RBC Canadian equity direct fund with active management, that has a better return to risk performance than the index (and presumably XDV or CDZ) or would that qualify as "chasing returns"... if so, does that mean the alpha of a manager's past performance is never worth paying for, even during our current volatile market conditions?


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## dogleg (Feb 5, 2010)

I4 ...: Be very aware of the term "actively managed " . It can mean something or nothing. Let me take you back three plus years to the Invesco Trimark fiasco . There was an internal war in the company and by the time the investors in their mutual funds twigged to what was happening some had lost nearly one-third or more of their money. Nobody , not Invesco or even the retail brokers had the professional integrity to alert the investors before it was too late. Millions were lost . A relative asked me to help him seek redress; I contacted the CEO, Peter Intraligi ; his answer was ,"We did everything we were legally obligated to do regardig disclosure. " Pretty much says it all. Good luck and beware.


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## 14dmoney (Jan 20, 2011)

dogleg said:


> I4 ...: Be very aware of the term "actively managed " . It can mean something or nothing. Let me take you back three plus years to the Invesco Trimark fiasco . There was an internal war in the company and by the time the investors in their mutual funds twigged to what was happening some had lost nearly one-third or more of their money. Nobody , not Invesco or even the retail brokers had the professional integrity to alert the investors before it was too late. Millions were lost . A relative asked me to help him seek redress; I contacted the CEO, Peter Intraligi ; his answer was ,"We did everything we were legally obligated to do regardig disclosure. " Pretty much says it all. Good luck and beware.


Sigh... unfortunately, we were one of those investors...


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## Belguy (May 24, 2010)

Consider the RBC O'Shaughnessy All-Canadian Equity Fund and compare it with the RBC Canadian Equity Fund before making your choice between the two.

If you haven't already, have a look at the 'model portfolios' at www.canadiancouchpotato.com

A good way to compare funds is to set up a 'Watchlist' at www.globeinvestor.com (iShares under Blackrock).

Stick to a few broad-based, low fee funds within an asset allocation target that you feel comfortable with.

Buy low fee products, hold through all market conditions, rebalance as required, and prosper.


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## I'm Howard (Oct 13, 2010)

14dmoney, what nest egg size are you talking and what is the cash shortfall between living expenses and pension inflow??

Not sure if you mentioned age and projected retirement?


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## 14dmoney (Jan 20, 2011)

Belguy said:


> Consider the RBC O'Shaughnessy All-Canadian Equity Fund and compare it with the RBC Canadian Equity Fund before making your choice between the two.
> 
> If you haven't already, have a look at the 'model portfolios' at www.canadiancouchpotato.com
> 
> ...


Hey Belguy,

Thanks for the suggestions. I have been very busy doing my homework and checking out all the options available so I am starting to feel slightly more informed. 

I do like the O'Shaughnessy funds but then I get worried about "chasing returns" as it has already gone up so much this past year (along with everything else). Chasing returns is something we did buying Trimark DSC funds in the 90's and we already discussed that fiasco. 

And you must admit that following good advice is easier said than done ....I have followed your thread on what to do with your fixed income allocation... so my question to you is: have you followed any of the other CMF members' suggestions? Or will you just hold onto your fixed income bonds through these conditions knowing it will likely do poorly as interest rates rise.

I feel less comfortable with my proposed increase in asset allocation to bonds now after getting feedback on this forum and am rethinking my options with maybe HISA and GIC's instead.


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## 14dmoney (Jan 20, 2011)

I'm Howard said:


> 14dmoney, what nest egg size are you talking and what is the cash shortfall between living expenses and pension inflow??
> 
> Not sure if you mentioned age and projected retirement?


Hi Howard,

We have a sizeable enough portfolio that we qualify as "high net worth" and we initially had a couple of discretionary wealth management firms review our portfolio to help us implement a more conservative investment strategy. 

We found one firm to be fairly evasive with the actual total costs of their fees as they pushed very complicated alternative investment products such as LLP's that then had complex rules based on returns etc. on top of flat fees and transaction costs.

Another firm was very transparent with their costs but we just didn't feel we would be well served by being limited to their brand of pooled funds for our entire portfolio when their reputation was based only on their bond products.

So in the end we decided to open a direct investing account combined with hiring a fee-based advisor who would have the discipline to help us stick to our new investment strategy. We will of course be paying more fees for our stock portfolio but we recognize that stock picking is beyond our ability so we will have to reassess whether it will be worth the added expense or whether we will eventually convert entirely to a couch potato strategy.

I am 47 and we have always lived below our means so am fortunate enough to think about semi-retiring in 3-5 years with the plan to retire by age 55. I have been self-employed my entire career so there is NO pension inflow.

I hope I am not being foolhardy by thinking we can pull this off but we have learned that there really is no one that will be as conscientious with your own money as yours truly.


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## 14dmoney (Jan 20, 2011)

14dmoney said:


> We have accumulated a decent nest egg but our portfolio consists entirely of high MER mutual funds (average cost approx 2.5% while getting no advice/ bad advice from our current advisor).
> 
> Our current asset mix is:
> 15% cash
> ...


So a big THANK-YOU to all the generous support from everyone who has helped me to gain more clarity on my situation so I have enough guts to actually go forward with making some changes. After all that's been said so far, I think I will revise my asset allocation to:

15% cash 
10% fixed income 
15% US equity
15% Foreign equity
45% Canadian equity

Within reason, I am going to bite the bullet and sell the high MER funds to align with my new investment goals so I can have an investment portfolio that allows me to sleep better at night.


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## kcowan (Jul 1, 2010)

14dmoney said:


> After all that's been said so far, I think I will revise my asset allocation to:
> 
> 15% cash
> 10% fixed income
> ...


Given how you responded to our questions, this looks like a reasonable compromise. Now you need to be careful about the timing of getting out of the high MER funds. If possible, you should choose a discount broker and move all your holdings into it. Then you will avoid futher interference from those that got you into these in the first place. They are salespeople after all. Then decide what you are going to buy to replace each holding before selling. You might even consider some temporary margin buying to bridge the gap. That will keep you invested while the sale of the various funds goes on. Good luck!


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## Toronto.gal (Jan 8, 2010)

kcowan said:


> Now you need to be careful about the timing of getting out of the high MER funds. If possible, you should choose a discount broker and move all your holdings into it.


That is exactly what I did, moved all in-kind because I wanted to be in control and sold gradually, not all at once.


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## warp (Sep 4, 2010)

Generally speaking a "broad based" ETF will work best for you.
You canbuy the TSX 60,,or the whole canadian market with Ishares etf's.

They have the most holdings and the lowest fees.

Last week I bought VT..( Vanguard Total World ETF), for several of my family's RRSP's.

It is in New York.....with the high CAN $ right now,,I feel its a good time to purchase US stocks.

You might consider VTI..( Vanguard total US stock market)

Also consider some dividend stock ETF's

If you are ok with a bit more try VBR...Vanguard US small cap value
I dont own it , but will buy it sooner or later.

Also for your Fixed income,,perhaps take a bit out of cash and put it in high a yield bond ETF like JNK or HYG....
Ishares in Canada has a $Can hedged one if you prefer...and BMO just came out with one too.
Remember though,,these are below investment grade bonds,,junk bonds...they have high yields but are riskier , so put only a small part into it,,,maybe 5% tops!

This is all assuming you dont feel comfortable buying individual stocks.

Eithr way...FIRE your "financial advisor".....keep more of your money.

good luck


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## Belguy (May 24, 2010)

I still am somewhat unsettled concerning my fixed income investments but there is quite a difference in our ages--you being 47 and me being 67. However, you are indicating that you are getting close to your projected retirement age and so a 75 percent equity allocation does seem to be on the somewhat aggressive side.

I am currently in the process of rebalancing my fixed income allocation back to my 40 per cent target. My core bond holding is the PH&N Bond Fund D but I supplement this with some high yield, JNK, and EDD Emerging Markets Debt holdings.

I am simply not in a position not to have this buffer built into my portfolio for when the stock markets take their next sudden drop. If, on the other hand, I was in my 30's or 40's, I would likely tilt more to equities knowing that I would have lots of time for my portfolio to recover from another inevitable sudden drop.

This comes from my experience of already having lived through three recessions and seeing how regularly they have occurred over the years.

Asset allocation is THE most important consideration when building a portfolio and many new investors discover, when the equity markets crash, that they did not have anywhere near the risk tolerance that they thought they had when they constructed their rather aggressive portfolios. This becomes all the more important the older that you get and especially as you enter into retirement and start drawing on your investments.

In fact, by the time that I am 70, I intend to change my asset allocation to 50 per cent cash and fixed income and 50 per cent equities and even that is probably more aggressive than it should be.

I may rethink this up to 70 per cent fixed income and 30 per cent equities.

The gut-wrenching drop in equities in 2008 didn't bother me all that much and I slept well each night through all of the horrific news but I realize that I would not be so brave when the equity rollercoaster ride takes it's next inevitable big drop.

Know yourself and set an asset allocation that you can feel comfortable with taking the worst case scenarios into consideration.

You worked hard to accumulate your wealth and you wouldn't want to lose much of it due to forces completely beyond your control.


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## 14dmoney (Jan 20, 2011)

kcowan said:


> Now you need to be careful about the timing of getting out of the high MER funds.


So here's the thing... we have quite a bit of capital gains incurred by selling off these high MER funds so it's going to be pay the Tax Man or pay the Fund Manager and FA. Am I doing the right thing to take the tax hit to decrease my MER costs? 

Also, is there any advice as to "timing" when to sell a mutual fund? ie. Do short-term moving averages help to decide when to put in the sell order? If so, which would be the best one to use for this purpose... 10dSMA, 20dSMA, MACD, or others...?



kcowan said:


> You might even consider some temporary margin buying to bridge the gap. That will keep you invested while the sale of the various funds goes on. Good luck!


What would be the typical cost of margin buying? I still have my cash position so couldn't I just use that as my buffer while my settlement goes through?


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## 14dmoney (Jan 20, 2011)

warp said:


> This is all assuming you dont feel comfortable buying individual stocks.


Well, I am watching the one and only stock pick that I actually executed (WMT) take a dip after their earnings report was released... oh well... not to worry.... buy, hold, and prosper is the mantra, right?

(Oh yeah, my other two picks were MDT and ABT but my now ex-advisor told me I should never buy anything in the Health sector, period.)


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## kcowan (Jul 1, 2010)

14dmoney said:


> So here's the thing... we have quite a bit of capital gains incurred by selling off these high MER funds so it's going to be pay the Tax Man or pay the Fund Manager and FA. Am I doing the right thing to take the tax hit to decrease my MER costs?
> 
> _*You might want to spread the hit over two tax years. You can carry forward or back so do you have any capital losses to compensate, e.g. take your lumps on WMT to offset?*_
> 
> ...


Always deploy cash first. The margin should only be used for temporary moves because the cost of margin exceeds the earnings from fixed income.


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## humble_pie (Jun 7, 2009)

yes, be especially careful about the timing.

i don't know why no one previously mentioned the tax consequences of selling if you do sell everything abruptly. One would assume that a "decent nest egg" includes paper gains that will be triggered to the extent they cannot be offset by selling the losing group of emerging funds.

deploying the move over 2 years is a good suggestion.

a year or so ago there appeared on this board a person moving the family nest egg, which was substantial, away from a full-service broker and into a couch potato etf portfolio. She did everything in a meticulously organized fashion. I remember warning her that the family's advisor, once he got a whiff that he was being dumped, would stop returning phone calls & generally make himself unavailable.

what happened was even worse. She posted back that he berated her & was quite rude & insulting about her ability to manage on her own (as i recall she had a postgraduate degree in biochemistry & the family had always been well-to-do ... some people, like this advisor, are totally impossible.)

so you might have a chilly deployment period of time, while waiting a year or 2 to mobilize the last of your funds out from the present advisor's clutches. What you could do is choose the funds to be left behind until next year, not only for tax purposes, but also for their transparency. In other words, you would understand them easily during the inter-regnum & you would not miss the advisor's advice or even his viewpoints.


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## Four Pillars (Apr 5, 2009)

Regarding taxes - you'll have to do some analysis (or get your advisor to do it) to determine if it is worthwhile to spread out the conversion of high MER funds to low-cost investments.

If you are already in a high tax bracket, it probably won't be advantageous to spread out the conversion. 

Regarding problems with the current advisor. As KCowan suggested - move all your holdings to your new direct broker account "in-kind" which means you will still own the same mutual funds at your discount broker. Then you can sell them at the desired rate.

You need never talk to your current advisor again.

http://www.abcsofinvesting.net/transfer-in-kind/


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## andrewf (Mar 1, 2010)

You should be able to transfer all the assets in kind, without triggering a taxable event. Most brokerages will allow you to sell mutual funds, though the commission is higher. It might be worthwhile to avoid dealing with a hostile advisor, if that's how it goes down.


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## Toronto.gal (Jan 8, 2010)

Four Pillars said:


> move all your holdings to your new direct broker account "in-kind" which means you will still own the same mutual funds at your discount broker. Then you can sell them at the desired rate. You need never talk to your current advisor again.


Precisely! By transferring all in-kind, you don't need the advisor at all. As well, you then have full control to sell when it's favourable for you, ie: when the market is positive, this is important because if you leave it to the advisor to sell for you, your funds could be sold at a very bad day in the market. 

As humble said, for tax purposes, timing is an important consideration. In my case when getting out of my high MER funds, I did not sell all at once; I started selling in 09 and will be rid of them this year, but each case of course is different. 

When I first handled the transfers, I was overwhelmed and confused, but actually it was not difficult at all, but you do need to examine all angles.


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## Homerhomer (Oct 18, 2010)

14dmoney said:


> (Oh yeah, my other two picks were MDT and ABT but my now ex-advisor told me I should never buy anything in the Health sector, period.)


Never is a very long time ;-). It may not be the right time now or in the near future, on the other hand it may be the right time now since nobody likes it ;-)

Congratulations on being able to accumulate the wealth and having enough smarts to cut loose all the leaches who want to prey on it.

My suggestion would be to read and learn as much as possible before you make a major move, and also since you have 30-50 years to kick around and long term investment horizon despite the plans of retirering shortly, I suggest reading as much as possible about dividend investing (site like this one www.dividendgrowth.ca), which could be employed as part of your ETF selections if you are not comfortable with individual stock picking.


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## Homerhomer (Oct 18, 2010)

Toronto.gal said:


> Precisely! By transferring all in-kind, you don't need the advisor at all. As well, you then have full control to sell when it's favourable for you, ie: when the market is positive, this is important because if you leave it to the advisor to sell for you, your funds could be sold at a very bad day in the market.
> 
> As humble said, for tax purposes, timing is an important consideration. In my case when getting out of my high MER funds, I did not sell all at once; I started selling in 09 and will be rid of them this year, but each case of course is different.
> 
> When I first handled the transfers, I was overwhelmed and confused, but actually it was not difficult at all, but you do need to examine all angles.


Great advise.


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## 14dmoney (Jan 20, 2011)

*Thanks!*

The decision to change my investment strategy has felt overwhelming albeit necessary so thank-you to all who posted advice. I am blown away by the generosity of the Senior Members in this forum in freely sharing their experiences and expertise. Thank-you, thank-you, thank-you!


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