Can I diversify with a few stocks or do I need a mutual fund? + MORE Mar 24th

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Q. I have $103,490 left on my mortgage and I pay $325 bi-weekly on it @2.89% fixed rate (mortgage is being renewed shortly). I have the ability to pay off up to 15% ($18,700) of the original mortgage annually in a lump sum without fees. Should I pull money out of my mutual funds (averaging 7% annual return) to put down a lump payment? Or, keep everything as it is? I can also pay down up to double the required bi-weekly payment without charges also, so possibly increasing the biweekly payment would be better? Any advice?
Thanks, Pete
A. Pete, this is actually a common question. People want to know where their money will be most effective. You have had a low rate on your mortgage and even with renewal, it will remain relatively low. Meanwhile, your mutual funds are earning 7%.
Related: Paying down an income property
I do not recommend withdrawing from a higher earning investment to pay down a lower cost debt. That would not be effective and there may be other fees associated with that strategy including possible deferred sales charge fees or maybe taxes (if RRSP money is involved)…

A sign for MF Global is displayed at an office building, Nov. 2, 2011 in New York. MF Global, the securities firm led by Jon Corzine, admitted using clients’ money as its financial troubles mounted, a federal official says. (AP Photo/Mark Lennihan)
Q. I have more than $100,000 invested in different U.S. and Canadian stocks with my bank’s brokerage. If the brokerage goes bankrupt, am I protected?
– Chi L.
A. There are many risks in investing, but the risk of losing your money as a result of your brokerage going bankrupt is small and shrinking.
Full-service brokerages, online brokerages and investment dealers who trade stocks and bonds are regulated by the Investment Industry Regulatory Association of Canada (IIROC) and are automatically members of the Canadian Investor Protection Fund (CIPF).
The role of the CIPF is to step in if a member firm becomes insolvent and is unable to return property it held on behalf of clients. You are covered for $1 million for all non-registered accounts and TFSAs combined, another $1 million for RRSPs and RRIFs, and a further $1 million for RESPs…

Having a few stocks doesn’t add up to the diversification of a fund. Shutterstock
 
Q. I would like to know if it’s better to own diverse stocks (for instance, one bank stock, one energy stock, one railway stock, one telecom, etc.) or mutual funds which are no-load and low MER such as the Mawer group of funds? Which method would be better for someone like myself who has a 15-to-20-year time horizon? How would I determine the best time to start cashing out? Is there a formula or book I can refer to?
Thanks! – Minnie
A. Minnie, this may be a case where a mutual fund, with its slightly higher costs, is the better choice than a stock portfolio. Why? It has to do with the difference between speculating and investing.
My definition of investing is the willingness to accept the average return of all of the stocks listed on a particular stock exchange. You can capture this return by investing in an index-type mutual fund or something similar. As long as you’re investing in businesses located in countries that allow the owners to keep their profits, then there is no reason why you shouldn’t be able to share in that profit if you invest with them…