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Cash in a cookie jar? Experts have advice for you

Advisers are coaxing market-wary customers back into stocks. But they are taking only tiny steps, and into the lowest-risk products

One of the country's largest mutual fund companies has decided it's time for investors to stop coddling themselves.

Despite a 33-per-cent stock market surge last year, many investors continue to shelter their money in money-market funds, savings accounts and other products that offer safety yet negligible returns. Dynamic Funds has decided that if it takes some tough love to get investors back into the stock markets, so be it.

"Diversification doesn't mean putting money under a mattress and in a coffee can," Dynamic says in an ad campaign it's been running online. "Get your money back into a real investment."

In another ad, Dynamic tells readers that diversifying is not the same thing as hiding money in different places. It then goes on to list sock drawers, cookie jars and mattresses as examples of where people are hiding their cash.

Individual advisers and strategists have been talking for months about the need for investors to venture out of safe investments that pay as little as zero and not much more than 1 per cent in many cases. But with the annual selling season for registered retirement savings plans and tax-free savings accounts under way, Dynamic's campaign signals a more aggressive approach is being taken.

"This is a little edgier than we have been in the past," said Jordy Chilcott, executive vice-president at Dynamic Funds. "It's tongue-in-cheek - hopefully we'll get a smile out of someone and drive them to have a conversation with their adviser."

Mr. Chilcott said the message of his firm's campaign is for investors to start participating in the market again.

Are they listening?

Dynamic led the mutual fund industry in overall net sales last month with $626-million, which Mr. Chilcott said is close to the robust levels of 2007. But investors are for the most part tiptoeing into the market through balanced funds - a mix of stocks and bonds - rather than jumping in with pure equity funds.

Three balanced funds, a bond fund and a single equity fund made up its most popular sellers in January, he said.

Getting people to move at least some of their money out of safe but unproductive investments serves the interest of both investors and the investment industry. Many people won't earn enough to retire comfortably using money market funds and savings accounts, and investment companies earn more from balanced and equity funds than they do from bond and money market funds.

The safety-first mindset is tenacious, though.

"People are still pretty conservative for sure," said Steve Geist, president of the mutual fund arm of the Canadian Imperial Bank of Commerce. "You hear of some surveys out there where people are saying 'I'm going to do nothing this RRSP season.' "

Mr. Geist reports that most of the money flowing into his company these days is headed for bond funds and mutual fund bundles with heavy helpings of bonds. The newest product innovation from this Top Five fund industry player? What else, but a bond fund.

The Renaissance Corporate Bond Capital Yield Fund offers higher returns than a conventional bond fund by focusing on bonds issued by companies rather than governments. In non-registered accounts, it further enhances returns through a derivatives strategy that turns bond interest into capital gains, which are taxed much more lightly.

Where once the fund industry would pop out a new kind of equity fund to jazz up its lineup, now more conservative fodder is the rule.

"If you look at what's coming out now, a lot of the innovation is around low-risk fixed income," said Earl Bederman, president of the research and analysis firm Investor Economics. "It's easier to sell in this kind of environment."

Advisers with market-wary clients have a few options for coaxing them into transferring at least some of their holdings in safe investments, said investment industry consultant Dan Richards.

For example, there's the dollar-cost averaging strategy of making regularly scheduled small investments in the stock market rather than one lump sum. The idea is to limit exposure to a sudden market retreat, even while committing the client to doing a little buying when the market is down.

Balanced funds are another option, as are ladders of bonds or guaranteed investment certificates. That's where an investor divides a sum of money into five parts and makes equal investments in terms of one through five years. Money comes up for renewal every year and is then reinvested in a new five-year term.

Another approach that advisers are using is to talk with investors about financial goals and not product, Mr. Richards said. The point of the exercise is to see how much savings a client will need for retirement, for example, and then see whether that goal is obtainable using safe investments.

Investors with ample savings may find they're okay with the safe stuff, Mr. Richards said. Others might have to take on more risk to achieve higher returns, save more or think about retiring later.

Mr. Richards said he hasn't noticed any one investing solution being touted this RRSP season, which he believes is a good thing.

"Whenever we've seen a silver-bullet mentality, it's tended to end up blowing up," he said.

"Look no further than income trusts as an example."

***

Playing it safe

The Investment Funds Institute of Canada's report on 2009 sales of mutual funds highlights the conservative mindset of investors:

Bond funds

Net sales of $12.6-billion in 2009, compared with net redemptions of $1.8-billion in 2008

Balanced funds

Net sales of $11.2-billion, compared with net redemptions of $1.1-billion in 2008

Equity funds

Net redemptions of $6-billion, compared with $12.2-billion in 2008

Rob Carrick

© 2007 The Globe and Mail. All rights reserved.

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