So... why do we invest? For our retirement? For our children? To improve our lives? To improve the world?

Investing Basics Ethical Investment Seminar Engineers Without Borders Ottawa Professional Chapter 15 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 Deposit  microplace.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to all over 18 (ie, not dependent on income!), carried forward indefinitely You never lose contribution room even when withdrawn Can withdraw at any time with no tax, and without affecting government benefits You can give money to your spouse that they can contribute to TFSA (they get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 significant House savings Rainy-day/emergency cash on hand A 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 fund Calvert 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 investment Calculated daily, paid to fund company monthly (you won't even see it) Fund managers must report their returns after deduction of MER in the prospectus But, 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 = % 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=  0.7% 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 stocks Funds with high MER will have a hard time beating the index But 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 advice  relatively expensive Discount  little to no personal advice  cheaper per trade Online  generally takes the discount model to the extreme  e.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 funds 20-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 return From: 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 do Index ETFs have lower MERs than funds Can buy US ETFs: foreign equity can now be held in any amount in RRSP Example 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