The first step to making good RRSP decisions is to figure out if making the contribution is the right course of action in the first place. Once you’ve decided that making a contribution makes sense, then you have to figure out where to invest the money.
What stage are you at?
How you invest your RRSPs will depend on what stage of investing you are at. When you are first starting out, you probably will keep things pretty simple. You might buy one or two investments at the same financial institution. The more money you have in your RRSPs, the more sophisticated you can get. Eventually, you should strive towards a Self-Directed RRSP.
Getting help or doing it yourself
The debate between advice or do it yourself has been around for a long time. There may have been a time when there was a significant advantage having a good financial advisor to help you invest. Although many people can still benefit from using advisors, the do-it-yourselfer today has all the tools and information to do it on their own. It’s really your preference, comfort and confidence that will determine your course.
I’ve often said, the do-it-yourselfer needs to have the time, knowledge and desire to manage their own portfolio. If you do not have these qualities then you may look to a professional to get help.
Getting help is not always easy because there is also a myriad of choices out there when it comes to choosing an advisor. The other problem is the financial industry is scalable and relies on commission as compensation. In other words, many financial advisors need a certain level of assets to make it worth their time. Those investors just starting out may have to start by heading to the bank.
Whether you use and advisor or not, here are five timeless tips I am constantly preaching when it comes to investing.
1. Develop a framework
There’s a lot of noise, confusion and way too much choice out there. The secret to investment success is to develop a framework or a plan. When I give investment advice, I always preach the merits of having a plan. Without it, you are living by the wing-it strategy.
When it comes to an investment plan, Warren Buffet said it best, “To invest successfully over a lifetime does not require stratospheric I.Q., unusual business insight or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
It's all about structure, framework and planning.
2. Keep it simple.
There is no shortage of information out there. In fact it’s become overwhelming and confusing. We have too much choice and it’s paralyzing us from making decisions. There’s something to be said about keeping it simple. If you think about it, the strategies that seem to stand the test of time are the ones that are simple. It's also so much easier to manage a simple portfolio. Maybe this is why the couch potato strategy continues to increase in popularity.
3. Don’t chase Performance
One of the first major research projects I did back in 1998 was about chasing performance with mutual funds and how often it works. I’ve updated this research so it includes data from 1985 to 2006 but I suspect the data would not change much if I brought it up to 2010. According to my research, chasing performance works about 15% of the time. In other words, choosing a top performer in one year will result in being a top performer the following year 15% of the time. 85% of the time it does not work which is not good odds.
4. Watch your fees
Fees do matter and yet so many people I meet have no clue what they are paying in fees. Study after study says that fees have a direct impact on your long term performance. If you want too look at my research on mutual fund fees and how they affect performance, here’s the link: Fees do matter.
5. Stay engaged
I suspect money it important to you. If so, you have to care about your money enough to stay engaged. It takes hard work to make money, so you need to invest some time into protecting and managing it. Don’t ignore your portfolio. If you don’t care, who will?
Any timeless tips you want to share with others?
Next week, more practical RRSP invesment tips