Investing tips for Group RRSPs and pensions
Group retirement plans like Group RRSPs, Defined Contribution Pensions and Deferred Profit Sharing Plans are great for members for a lot of reasons like matching contributions from the employer, lower management fees and the automation of savings through payroll deductions.
One of the biggest challenges I hear over and over again is that investors are having difficulty making investment decisions. Investing can be confusing, intimidating and overwhelming but it does not have to be that way. With group retirement plans, my suggestion is to simplify so here are my top investment tips for group plans.
Passive investors should use the asset allocation funds
Many people I meet are hands-off, passive investors. They do not have the desire, passion, knowledge or time to watch their investments regularly. Most group retirement plans include Asset Allocation funds for these passive investors.
All you have to do with Asset Allocation Funds is to choose the right fund based on your risk tolerance, time horizon, and investment objectives. The funds are hands-off because you don’t have to worry about managing the portfolio because the funds automatically rebalanced from time to time.
Even with this hands-off approach, members should review their risk profile from time to time to see if the fund they have still matched their circumstances.
Look for the lower fees
Investors go to great lengths to try and improve the performance of their investments. In some cases, they hire financial advisors to invest for them. In other cases, they try to use research to give them the edge when picking the next winning stock or investment. Some people spend a lot of time trying to predict the direction of the economy, gold prices, interest rates, and the stock market. And, of course, many investors seek hot tips or ‘insider information’ from people they trust.
Sadly, despite all the effort, very few investors ever find a competitive edge with these strategies. Even worse is the fact that investors tend to ignore the one key to giving them a true competitive advantage when it comes to investing successfully: Reducing the fees they pay. In fact, fees are one of the biggest determinants of performance, and investors have more control over fees than they think.
When selecting investments look for investments with lower fees. Look for passive index products and you are likely to lower your fees even more.
Don’t chase performance
I’ve done a lot of research on this strategy and my conclusion is chasing performance is probably the worst thing you can do. The investment industry is quick to tell you that “past performance is no indication of future performance” and they are 100% accurate.
Despite the warnings, it remains the one thing most people do because investor psychology or emotions lead people to the wrong behavior. Chasing performance is natural because the human brain naturally extrapolates and thinks in straight lines. Unfortunately for investors, investments never move in straight lines. The worst thing you can do is go through the investments, look at the past returns and choose the investments that have done the best. My research suggests that chasing winners will cause you to lose 85% of the time.
Don’t leave it to the default
I understand that many investors are passive and don’t really like to invest but leaving it to the default is not ideal. Every plan has a default investment. It’s usually cash or something really conservative. There’s nothing wrong with being conservative if you want to be but I have seen many investors with their money in the default when their situation suggests something completely different.
Even if you are hands-off, take a few minutes to complete the risk profile questionnaire and choose the corresponding asset allocation fund that matches your profile. You could even choose a retirement date or target-date fund matching your target retirement date. Just don’t leave it to the default.
Review the plan once a year
Even passive investors should review their portfolios from time to time. There’s an old saying I am passionate about “If you take care of your money, it will one day take care of you.” Taking care of your portfolio means reviewing it. My suggestion is at least once per year. Here are a few things you can review:
- Am I saving enough money?
- Can I afford to increase contributions?
- What is my personal rate of return?
- Do I need to rebalance the portfolio?
- Do I need to adjust the asset mix?
- Have my personal circumstances changed?
- Do I have the right beneficiaries?
- Am I getting close to retirement?
- Do I have too much risk in the portfolio?
This list is not exhaustive but a great place to start if you have not reviewed your plan for a while.