Changing investments in a Group RRSP

I've always said that psychology plays a big role in investing. I've been seeing this first hand when we are providing financial education for members of Group RRSP and Pension Plans.

Good news about returns

Recently, I was talking to a group of employees and showed them the returns on the asset allocation funds within their Group RRSP plan.  The returns were pretty solid:
Fund Name 1 year 3 years 5 years 10 years
Conservative Portfolio 10.89 7.64 7.58 6.37
Moderate Portfolio 12.73 9.17 8.72 6.96
Balanced Portfolio 16.18 11.24 9.57 7.37
Advanced Portfolio 19.93 13.25 11.02 7.86
Aggressive Portfolio 23.86 15.45 12.28 7.99

It's human nature to be attracted to the investments with the highest returns (in this case the Aggressive Asset Allocation Fund).  After all, we all want to make as much money as possible with our investments.

Snapshot performance

The problem with this data is the is no guarantee that the Aggressive Portfolio will always do the best.  In fact, we have all heard the industry disclaimer – Past performance is no indication of future performance.  We can see this when we look at data from the same fund back in 2008 when the markets were losing money.

1 YR 3 YR 5 YR 10 YR
Conservative Portfolio -1.04 3.14 4.49 5.81
Moderate Portfolio -7.09 1.58 4.14 5.72
Balanced  Portfolio -11.29 0.57 4.17 5.40
Advanced Portfolio -18.39 -1.78 3.30 5.56
Aggressive Portfolio -25.29 -4.06 1.86 3.99

In this case, the Aggressive Portfolio fund has the worst performance instead of the best and most people are probably inclined to stay away from such a lousy performer.

Both these pictures are an example of snapshot performance.  Looking at performance data at one point in time can be very misleading even over 5 and 10 year periods.

Related article:  Making sense of Snapshot Performance

The urge to take more risks

Remember that when it comes to money and investing, psychology can be more powerful than logic.  I talked to Nick, who has $58,000 invested in the Conservative Portfolio but thought he should change his investments to be more aggressive because he is behind in his retirement savings.  He is 47 and plans to work till 65.  With 18 years to retirement, one could argue that he has the time horizon to investing in something more aggressive if he wanted to.

Related article:  5 ways to measure investment risk

Buy Low, Sell High

One of the concerns with changing investments and moving money into a more aggressive fund is that most people want to do so after growth has already happened because we tend to think in straight lines.  When an investment is going up we can't help but hope and think it will keep going up.  I'm not a market timing kind go guy but one might argue that we are now almost 4 years into a strong bear market and the likelihood of a correction or bear market gets greater and greater.  It could be a risk of bad timing. Imagine moving the money from the Conservative Portfolio to the Aggressive Portfolio and then shortly after, the market drops significantly.

Related article:  Buy Low, Sell High is the secret to successful investing

If you believe in re-balancing a portfolio, one might argue its a great time to take profits and invest those profits into under performing asset classes like bonds and cash instead of changing investments to be more aggressive.

Best of both worlds

To mitigate this risk of bad timing, one of the options it to leave the existing money in the Conservative Portfolio Fund and then direct new contributions of $392 per paycheque to the Aggressive Portfolio Fund.  Investing regularly into a more volatile investment is called dollar cost averaging where market downturns can actually benefit you because you buy more units when the price drops.

Related article:  The Power of Dollar Cost Averaging

At the end of the day, it's Nick's money and he can do whatever he wants.  He could leave everything as is.  He could switch the investment to a more aggressive option like the Aggressive Portfolio or he can take a middle of the road approach by leaving the current investment alone but redirect his monthly contributions to the more aggressive fund.

Which strategy makes the most sense to you?  What do you think Nick should do?

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

One Response to Changing investments in a Group RRSP

  1. Invest with the big banks and do not take chances. I invested with mortgage company with their verbal promises and good returns – they however made signed off on risk and guess what. My account was frozen, no interest, no pay out of expired GIC – hey but they kept their 6 digit salary even more employees (family members) and would not answer my questions on investments, in fact they called the police to advise I could not go to their office for help..

    I went to various BC Securities for help and got a royal run around by them too. The bottom line is when you invest and when things go wrong, no one help you.

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