So... why do we invest?

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

2. Investing Basics • Ethical Investment SeminarEngineers Without BordersOttawa Professional Chapter15 February 2009

3. 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

4. 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

5. 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all over 18 (ie, not dependent on income!), carried forward indefinitely • You never lose contribution room even when withdrawn • Can withdraw at any time with no tax, and without affecting government benefits • You can give money to your spouse that they can contribute to TFSA (they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)

6. 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

7. Retirement: TFSA vs. RRSP TFSA It all depends on your tax rates now vs. in retirement RRSP

8. Cost of owning a fund Calvert Capital Accumulation A

9. Loads

10. Back- and front-end loads • Sales commissions applied to the entire principal amount (front-end) or entire final amount (back-end, or deferred load)

11. Management expense ratio (MER)

12. 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)

13. 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?

14. 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= 0.007 • 0.7% annualized return over 3 years

15. 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!

16. Costs of buying stock • Apart from the annual cost of having the account, each buy order and sell order incurs a commission

17. 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

18. 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

19. Example of 8 Random Walks

20. Asset Allocation • All securities can be characterized by two features: risk and return From: Investopedia.com, Achieving optimal asset allocation, by Shauna Carthner:

21. Asset Allocation • The longer you hold a portfolio of stocks, the less volatile your return

22. Asset Allocation

23. 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

24. 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)

25. 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:

26. 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

27. What Type of Ethical Investor Are You? (break with workbook) • The Four Spokes of Ethical Investing • Avoidance Screening • Affirmative Screening • Community Investing • Stakeholder Activism