For the third time in a row, a Global Fund Investor Experience (GFIE) report from Morningstar Inc. in Chicago has ranked Canada as the lowest-scoring country in this category. Meanwhile, our friends to the south earned top marks: the United States got a stellar ‘A’ rating versus Canada’s bottom-scraping ‘F.’ What’s more, the remaining 22 European, Asian, African and Commonwealth countries in the comparison were at least capable of a passing score, if not much better. The full report is provided here.

The notable fact that two neighbouring countries are at the top and bottom of the spectrum for average fees paid was not lost on Morningstar. “The United States… is marked by a large number of self-directed investors, economies of scale, a high level of price competition, a retirement tax preference that uses the same investments for tax-preferred investments, and one of the highest percentages of assets paying an outside advisory fee not reflected in a fund’s total expense ratio,” the GFIE report said. “Canada is on the opposite end for all those factors, plus Canada levies a consumption tax on fund management services.”

For savvy investors, news of Canada’s contemptible mutual fund costs is hardly a bombshell revelation. But this latest GFIE report at the very least adds another considerable voice of dissent to the growing number of media pundits and advocacy groups now demanding an overhaul of Canada’s mutual fund industry. As it stands, the high cost of buying funds here can be attributed to many unsavoury practices, including self-interested salespeople, opaque contracts and hidden fees. The well-known fact that the vast majority of Canada’s actively managed mutual funds are in fact closet index-huggers makes paying these kind of inflated prices even more outrageous.

As the Morningstar reports lays out, Canada isn’t following the lead of the growing number of countries moving away from load fees. For instance, in half the countries in the GFIE study, front-end loads either don’t exist (albeit rarely) or are commonly negotiated away by retail investors. As for deferred sales charges, Morningstar states that these have fallen steeply out of favour in the top-ranking U.S., “with many fund companies shutting down the share classes that charged deferred loads.”

So what’s happening in Canada? Nothing to brag about. Canada stood alone with Japan as having the highest fixed-income fees, and only Canada and Italy were among countries with average fees for equity funds surging beyond 2% (in the U.S., these expenses are below 1%). Canada also took the dubious honour of having the only average allocation fund fees over 2%.

Reading all of this is enough to make anyone want to swear off mutual funds in Canada. However, it’s critical for investors—particularly those looking for an uncomplicated long-term investment strategy and those with limited resources—to know that the actual structure of mutual funds is sound when used properly. For instance, Canadian fund providers such as Mawer, Steadyhand, and Phillips, Hager & North are providing excellent value to investors—providing lineups of low-cost, no-load active funds that are concentrated, unconstrained and non-benchmark oriented.

Be sure to watch out for my feature, “The Smart Investor’s Guide To Mutual Funds,” in the forthcoming summer issue of MoneySense. The article will provide a comprehensive overview for using mutual funds correctly, and for avoiding their many pitfalls. As it stands, Canadian mutual fund investors deserve a lot better than they’re getting.

Karen McRae, senior vice president at Mackenzie Investments, points out that when commodity prices fall, so does the dollar. At US$0.97, the loonie is trading at historically high levels. If global stock markets sink, the U.S. dollar tends to strengthen and hedging may not look so attractive.

In fact, McRae says there may never be a good time to hedge. “The U.S. dollar has a negative correlation with equity markets because of its safe haven status, so having exposure can be a good source of diversification.”

She’s also found that not hedging tends to provide lower return volatility over the long-term, though only with U.S. investments. Hedging 50% of international assets minimizes overall portfolio risk, she says.

Certified financial planner Fred Kirby also thinks foreign currency can be a good diversifier. He thinks it likely the Canadian dollar will fall in the short-term but isn’t willing to avoid hedging completely. Most portfolios should have between 25% and 35% exposure to U.S. and international stocks and those currencies. Stay in that range and there’s no need to hedge.

However, any investor with more than 35% in non-Canadian equities should hedge, Kirby says. Otherwise too much of your money will be dictated by the currency market. “Currency exposure adds a hidden asset class that is generally not correlated with the equity markets,” he says. “But one must guard against overweighting that exposure.”

Protecting against currency fluctuations is costly. Hedging the S&P 500 costs investors about 0.5% a year, or about 15% more in fees. If our dollar falls further, and you’re hedged, not only will you not be taking advantage of the appreciating greenback, you’ll be losing extra on fees too. Of course, if the loonie drops and then rises again, those additional costs could be worth it. “It’s all about balance,” Kirby concludes.

—Linda Kerley, Waterloo, Ont.

A: My standing Starbucks order is simple but boring: “Tall, mild, no room.” My approach to asset allocation is equally simple and boring: choose one asset mix and stick with it unless circumstances change. It’s extremely difficult to time markets successfully, so focus on what you can control, which in your case is the asset mix.

For the record, some would argue international equities are cheap compared to Canada’s. But that’s not the point. If you’re currently overweight in Canadian equities, you should rebalance now and return to your target allocation rather than wait for valuations to be more favourable.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal question? Write to Bruce at ask@moneysense.ca.

Invest in an RRSP

The key goal of retirement planning is to ensure you have enough money to maintain your lifestyle. You need to save enough that, along with government benefits, your annual retirement income ranges from 60% to 80% of pre-retirement income. If you’re careful with money and expect a modest, yet comfortable, middle-class lifestyle, living off 60% of your pre-retirement income should be enough. If you want to travel the world in style, golf regularly or buy a cottage, plan on 80% of pre-retirement income.

RRSPs are the most efficient way that the majority of Canadians can get there. Contributions are tax-deductible and tax-deferred until the money is withdrawn. You can contribute up to 18% of your previous year’s earned income and unused contribution room can be carried forward indefinitely.

Spousal RRSPs let you split future retirement income with a spouse. Contributors deduct the money on their tax returns but when it is withdrawn from the RRSP or RRIF in retirement, the income is taxed in the spouse’s name, at their (hopefully lower) tax rate. This works well when a higher-income spouse contributes for a lower-income spouse, maximizing tax savings on the contribution and minimizing taxes payable when withdrawn in retirement.

Richard Barrette, 39, and his wife Kathleen, 37, are making use of a recent $23,000 severance Richard received. He will use $10,000 to repay money they owe to their own RRSPs through the Home Buyers’ Plan, a program that allows you to temporarily withdraw funds tax-free to buy a home. The rest will go into a spousal RRSP for Kathleen, who is now pregnant with their second child. “We want to avoid the taxes right now and rolling the severance payment directly over to the RRSP allows us to do just that,” says Richard, who works for the public service in Ottawa. “I have enough RRSP contribution room from prior years to make this rollover.”

Marko Koskenoja of Sault Ste. Marie, Ont., is also focused on his RRSPs. The 53-year-old sales rep and his wife Ruth, 46, invest their retirement savings in low-cost index mutual funds. “I like the feeling of security healthy savings gives me,” says Marko. “I believe in self-sufficiency.” The good news? If Marko leaves his $10,000 RRSP contribution untouched, earning 6% a year, it will double to $20,000 in 12 years.

Give Back

Set up a fund for a refugee family in your community. That’s what 47-year-old Anita Van Nest of Newmarket, Ont., did last year with her extra $10,000. “It opened my eyes to how much I really didn’t need the money,” says Van Nest, who is studying to be a minister. “It was just wonderful for the spirit.”

• What to do with $1,000 now
• What to do with $100,000 now
• What to do with $1 million now

Invest in RESPs

Ask Jeremy Mercer, 43, what he’ll do with his tax refund this year and he doesn’t hesitate. “Before I’m tempted to spend it, I’ll contribute $10,000 to my kids’ Registered Education Savings Plans,” says Jeremy, an engineer who lives in Edmonton with wife Jennifer, 41, and two young kids. A savvy do-it-yourself investor, Jeremy buys dividend-paying stocks for the kids’ education accounts. The RESPs hold Canadian bank stocks, Pizza Pizza, Parkland Fuel Corp. and other blue chips.

Jeremy chose RESPs because of their potential to double his investment rapidly. A contribution of $10,000 in his children’s RESPs today, assuming a 6% annual return and the payment of the Canada Education Savings Grant (CESG), will double to $20,000 in just 10 years—when his kids will be at post-secondary schools. Every child born in Canada accrues $2,500 worth of grant eligible room each year till age 17. The CESG gives each child 20% on each dollar of the first $2,500 saved in an RESP each year. Depending on net family income, you may be able to receive an extra 10% to 20% on every dollar of the first $500 you save. The lifetime maximum CESG grant is $7,200 per child.

But it gets better. Besides free grant money, Jeremy loves that there are no taxes payable on money earned in RESPs until it’s withdrawn. When RESP grants and earnings are withdrawn by the child for educational reasons, they are taxed at the student’s tax rate, which is usually lower. Most students have an effective tax rate of zero, meaning that your original contributions, the grant money, interest, dividends and capital gains can be withdrawn almost tax-free in any year the child attends post secondary education.

Buy a franchise

As an undergrad in the 1970s, Greig Clark started a painting company to pay for school. That first summer he earned $3,000. By 1978, he’d spun his business into 88 College Pro Painters franchises that earned a combined $40 million. “I taught students how to do as well as me, or better—that was the key to success,” says Clark, who spends his time championing 40 Oaks, a residence for the homeless. He sold College Pro in 1989, but aspiring entrepreneurs looking to replicate his success can benefit from his proven model and buy a franchise.

Franchisees need to do their homework. Research by Wayne State University economist Timothy Bates shows only 62% of franchises still operate after four years. The main reason: lack of profitability. If considering a franchise, do your research and factor in all costs, including start-up and royalty fees.

A condo in Florida

Real estate investors aren’t overly concerned about a potential Canadian housing crash. That’s because they’ve been shopping for properties south of the border. Don’t pick a property just because it’s cheap. A $46,000 condo in Florida may sound enticing, but it could be in a neighbourhood known for crime and vandalism. To avoid such pitfalls, examine the neighbourhood, the local economy, crime rates and potential rental income—all information readily available online. Also, calculate overall costs for maintaining the property and become familiar with U.S. and Canadian tax-filing requirements. Your priority should be cash-flow positive rental income, as making money through price appreciation is far more speculative.

Clear your debts

Recently a MoneySense reader wrote in asking for help. At age 31 she and her husband had finished university and landed good jobs, but were crippled by more than $75,000 in student loans—$25,000 of it on credit cards. Suddenly the reader received a $100,000 inheritance. She wanted to know if it would be wise to use the money as a down payment on a home. Despite the urge to splurge, your first step should be to pay off all non-deductible debt. Non-deductible debts are loans that are not tax deductible, including mortgages, unpaid credit-card balances, car or student loans and personal lines of credit.

“Don’t assume you need to spend or invest the money,” says David Lloyd, chief wealth officer at Newport Partners. Sage advice considering the average Canadian carries $26,768 in non-mortgage debt. So where is the best place to start? Try to pay off all high-interest loans first.

By eliminating $50,000 in student loans, our reader saves $23,000 in interest over the next 10 years. Paying off high-interest credit cards saves a further $19,000. Together, the debt repayment equates to a 42% return on investment, still leaving our reader with $25,000 for a down payment on a home.

Hire a pro to manage your money

When investing, possibilities open up once a portfolio passes $100,000. For a big pay-off you could risk it all on an up-and-coming stock like Netflix. If you’d bought $100,000 of shares in the online media streaming company on June 1, 2012, at $62.95/share, and sold on Feb. 15, 2013, at $189.51/share, you’d have tripled your money—making a quick $201,048 profit. But risking it all on an individual stocks is a strategy that appeals only to those with a very high risk tolerance.

For the rest of us, once a portfolio is this large, professional financial advisers will be all too happy to help you out. While investment counsel will charge annual fees of 1% or more of your portfolio, customized portfolios set up with the appropriate asset allocation will perform better in the long run. Start with a detailed written investment policy that describes your goals and strategy, says Brinsley Saleken, a fee-only financial planner with MacDonald, Shymko & Co. Ltd. This helps your planner ensure your goals don’t get derailed by fear, emotions, or short-term economic conditions.

What are some good investments to hold in your portfolio these days? David Lloyd at Newport Partners advises against holding government bonds because interest rates are so low. He prefers mortgage-backed securities, high-yield bonds or REITs. Or consider low-fee mutual funds like those offered by Phillips, Hager & North or Steadyhand. If you lack interest in the market, consider ETFs or index mutual funds like the TD e-Series Funds. They move with market indexes, require little investment savvy and cost less than actively-managed funds.

Reward yourself

Quebec tourism agency Uniktour will offer private space travel by 2014. The two packages, priced at $95,000 and $100,000, include hotel stays and astronaut training.

• What to do with $1,000 now
• What to do with $10,000 now
• What to do with $1 million now

Beyond stocks and bonds

In this volatile, low-interest-rate market, where should high net worth investors put their money? “Many people have a sour taste in their mouth from 2008, which is why so much money is sitting on the sidelines,” says David Lloyd of Newport Partners. Savvy investors look not only to grow their money, but to make it double faster.

The first thing to do is make sure you’re not overinvested in the Canadian market, says Tom Bradley, president of Steadyhand, a no-load mutual fund company. “Over the last 10 years, Canadian stocks have been the star but this is changing.” Instead, invest more in U.S. or international equities. And don’t bother with government bonds. Interest rates are poised to rise so it’s time to get “a little more creative in the non-equity investing category,” says Lloyd. Alternatives include private equity funds, mortgage investment corporations (MICs), infrastructure funds and public-private partnerships. These options have maturity dates and time horizons of 10 or more years, explains Lloyd.

If you want an option that’s not correlated with financial markets, consider becoming an angel investor. As an accredited investor with at least $1 million in investable assets, you can invest directly in a business. This is what former Scotia Capital veteran Gerard Buckley did after retiring in 2008. “I take the prudent portfolio management approach,” he says. Buckley eliminates the concepts he doesn’t think are viable, sticks to businesses he knows and thoroughly investigates a company’s fundamentals. He risks only up to 10% of his money in start-ups, leaving 90% in a balanced equity/bond portfolio. “Angel investing is patient capital,” says Buckley. “There’s no liquidity. If you don’t like the investment there’s no one to sell it to. But there are significant rewards if it does succeed.” For example, says Buckley, if you invested in seven businesses you could expect three to fail, two may break even, one might provide a modest return, and hopefully one will return ten to fifteen times your investment over a period of five to eight years.

Create your own startup

Robert Bakker is a born risk taker. In 30 years he has built and sold 21 successful start-up companies. Now, the South African-born entrepreneur (Bakker is not his real name) is looking for a 300% return over the next five years. His plan? Invest $1 million in yet another business.

“Bankers and financial planners think I’m crazy. They say I take on too much risk,” says Bakker. But he doesn’t see it that way. “I’ve already done it. I have the experience and I’ve made more money building businesses than investing in the stock market.”

This is a common sentiment among successful entrepreneurs. Those who’ve made money in their businesses will often reinvest the gains in other private enterprises. “It’s familiar to them,” says David Lloyd at Newport Partners. Despite all the expertise, says Lloyd, the results on this kind of investment are mixed. To be successful, you need to know when to spot opportunities and when to take risks.

Bakker knows this. “Just because I’ve built and sold 21 successful businesses doesn’t mean the 22nd won’t fail. But I have more control over my money this way.”

Reward yourself

Buying a lake-front property in Muskoka, Ont., starts at $1 million, but the joy of entertaining the whole family is priceless. The ultimate in privacy is your own private island but be prepared to factor in expenses like transportation or hydro.

• What to do with $1,000 now
• What to do with $10,000 now
• What to do with $100,000 now

What to do with $1,000

At some time or another, we’re all bound to get a tidy $1,000 windfall. It will likely come in the form of a tax refund cheque, a stock dividend payment, money from the sale of a used car or perhaps even a hefty birthday gift from Grandma. But wherever it comes from, make no mistake, $1,000 can get you well on your way to improving not only your finances but also your career path, family life and personal growth. We’ll show you how.

Pay down your debt

Heather Rennalls, a 49-year-old social services provider in Woodstock, Ont., knows exactly what she’ll do when she gets her $1,000 tax refund. “I’ll pay down my debt,” says Rennalls, who owes $3,400 on a line of credit and $22,244 in mortgage debt. Her goal is to pay these off in 18 months so she’ll be debt-free by 51. “I have other goals but to reach these, I have to focus first on paying off debt. That will allow me to make a career change and start focusing on retirement planning in earnest. Short-term pain for long-term gain.”

She’s right. Debt limits options so eliminating it should be a No. 1 priority—ahead of saving, investing or buying a new car. It’s also a simple way to double your money. Say you have $1,200 of debt on a credit card charging 19% in interest. If you pay only the minimum monthly payment, it will take 11 years and 6 months to pay it all off. Total interest is a hefty $1,113—almost what you had on your card to start with. But take that $1,000 and pay down your credit-card debt now and the debt could be totally paid off in three months, saving over $1,000 in interest. In one fell swoop you’ve doubled your money.

The same concept also works for your mortgage. A $180,000 mortgage at a fixed rate of 5% with monthly payments of $1,052 takes 25 years to pay off. Total interest would be a whopping $135,675. Apply your $1,000 tax refund to your mortgage each year and the interest saved over the total mortgage term would be $20,755, and you’d be mortgage free three years sooner. Every dollar put towards the mortgage is almost doubled by saving interest over the mortgage’s life. “You should minimize your debts at all times but certainly be out of debt—including mortgage debt—by age 60,” says Alfred Feth, a fee-only adviser in Waterloo, Ont. “It makes the money decisions in your life so much easier.”

Toronto-based financial coach Avraham Byers recommends keeping a daily spending journal. “If you spend more than you make, nip it in the bud.” Focus on a few spending goals at a time—stop eating out or limit dry-cleaning bills. “Once your budget balances, you’ve found the sweet spot,” he says. Tackle the high-interest-rate debt first, consolidate debts to a lower-interest rate, or cut up your credit cards if you can’t pay off total balances each month. “Set a date when you want to be debt-free,” says money coach and author Sheila Walkington. “Once set, you’ll be surprised how creative you can be at achieving this—saving you thousands in needless interest payments.”

Invest in a TFSA

If there’s one thing Canadians love, it’s saving on tax. Tax-free savings accounts, introduced in 2009, let you save and invest without paying any tax on growth. All interest, dividends and capital gains are sheltered, even when you withdraw the funds. “I use the TFSA to maximize the value of my money,” says U.J. Ramdas, a 25-year-old therapist and entrepreneur whose annual tax refund is $2,000—half of which goes to his TFSA. “The $1,000 is deposited straight into the TFSA so I don’t see it. I buy stocks and bonds, depending on my research. That’s money going towards the future. It will grow over the years.”

TFSAs are especially effective for those who maxed out their RRSPs or who, like Ramdas, earn under $50,000 and are in lower tax brackets. Annual TFSA contribution room was raised to $5,500 in 2013. Any Canadian over age 18 can contribute, while unused contribution room carries over indefinitely to the future. If you haven’t yet contributed, you have $25,500 available currently, even if you haven’t yet opened an account.

Unlike RRSPs, contributions to TFSAs are not tax-deductible but they have several advantages. In addition to tax-free growth of the investment income, withdrawals don’t affect income-tested government benefits like Old Age Security (OAS), the Guaranteed Income Supplement (GIS) or GST/HST credits. “It’s great for additional savings for retirement and shorter-term goals like building an emergency fund or saving for a home down payment,” says Sheila Walkington, co-founder of Money Coaches Canada. Choose a self-directed TFSA investment account that lets you hold stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other investments that can generate higher returns than savings accounts. A portfolio of 50% bonds to 50% equities is likely to return 6% a year, doubling your money in 12 years. “A portfolio of solid blue-chip, dividend-paying stocks can return 7% annually,” says Toronto fee-only adviser Jason Heath. “Small-cap stocks, about 9%.” Riskier IPOs or micro-cap stocks have potential for huge returns—12% or more—doubling your money in six short years. But be careful. “There’s more volatility when you take on more risk,” says Heath. “You have to do a good assessment of the risk.”

For long-term goals like retirement, dividend and growth funds or a balanced portfolio of ETFs make sense. “You’re keeping costs low and getting solid returns that can average 6% a year,” says fee-only adviser Alfred Feth. At that rate, $1,000 in a TFSA will double to $2,000 in 12 years. But if you have high-interest credit card or mortgage debt,TFSAs can wait until the debt is paid off.

• What to do with $10,000 now
• What to do with $100,000 now
• What to do with $1 million now

Develop new life skills

Jenni Thompson, 27, spent much of 2011 unemployed and despondent. Then, on her father’s advice, she hired life coach Caird Urquhart of Newroad Coaching in Toronto to get her journalism career back on track. “Not being able to find a job for so long hurt my self-confidence,” Thompson says. “My life coach gave me the focus I needed to follow up on potential job leads. She didn’t let me give up on myself.”

It worked. After investing in about $1,000 worth of weekly life coaching sessions, Thompson landed her dream job as a social media editor at a local newspaper. She says investing in herself and her career was the best thing she could have done with the money. “It’s paid me back many times over by giving me a good salary and benefits, and some great career experience.”

Others have also used extra cash to learn new life skills. Take U.J. Ramdas of Toronto. Every year, the self-employed therapist invests $1,000 of his tax refund in himself. This year he’s doing two things: upgrading his life-saving skills by taking first aid courses and signing up for an intensive meditation course at the Vipassana Centre in Toronto. “These investments in myself maximize my value as a human being,” Ramdas says. “It makes me a better person and I’m just happier.”

Amanda Mills, a financial therapist with Loose Change in Toronto, fully supports this idea. “Take a pottery class, travel, join a biking club,” says Mills. “These are all things that will inspire you to do great things. That’s priceless.” So what did Amanda do when she recently came into $1,000? “I bought an old, used upright piano,” Mills confesses with a laugh. “I played the piano as a teenager and having one in my apartment now that I’m older brings me more joy than I can describe.”

Reward yourself

Treat yourself to a relaxing four-night Caribbean cruise with Celebrity Cruises ($399 per person, which includes a cabin with a balcony). Sunny Cozumel, Key West and Miami are ports of call. About $1,000 per person with airfare.

For $25 an hour, hire a maid Saturday mornings so you can do Yoga, take a piano lesson or do some birdwatching. You’ll feel energized.