Tips for Investing Your RRSPs

The end of RRSP season is fast approaching. The very first step to RRSP investing is to determine if the RRSP makes sense for you. In my experience, I think that 80% of the time, the RRSP is still one of the best investments for investors because of the significant tax benefits. You must take the time to understand your marginal tax rates to understand whether RRSPs will benefit you.

The next step to RRSP investing is to decide what to invest in. While it would not be prudent for me to provide a list of investments because every investor is unique, I will offer some of my RRSP investment tips for 2001.

  1. Buy Low – Over and over again, I see investors doing the wrong things at the wrong time. They buy when they should sell and they sell when they should buy. We have just come off one of the worst years for world markets in the last decade. We may be sitting on one of the best buying opportunities we have seen in many years.
  2. Global Investing. While I have always been an advocate in global investing, I see more value in this advice than ever. Canada had one of the top performing markets in the world last year with a TSE300 total return of 7.4%. The MSCI (Morgan Stanley Composite Index) World Index did not fare as well with a 9.9% loss. There are many reasons why you should invest globally: Canada only represents 3% of the world investments, investing globally can enhance returns and reduce risk, and some of the best investments are outside of Canadian borders. Today world investments offer good value given the market volatility last year.The maximum foreign content has been increased to 30% for 2001. I would encourage you to not only maximize your foreign exposure but also look to RRSP clone funds to increase foreign investing beyond 30%.
  3. Look for broad mandate funds. In the past few years, there has been an increasing trend to sector based investment products. Every financial institution was on the bandwagon to have technology, health science, financial services, and other sector focused funds. When times were good, these funds were great. But in the recent volatility, investors have had a lesson on risk of sector focus funds. Broad mandate funds are not trendy and have withstood the test of time. I prefer broad mandate funds because they should go up when markets go up, but they also tend to weather volatility on the downside much better. Broad mandate funds give managers more freedom and impose fewer restrictions. In my opinion, broad mandate funds should comprise at least 50% of your portfolio.
  4. Don’t chase performance. This is probably the biggest mistake investors make. According to my research there is a 90% correlation that last year’s best performing investments will be this year’s best selling investments. This should mean that Bonds, Money Markets and Canadian Equities will lead the way in sales for RRSP season. Unfortunately, there is less than a 10% chance that last year’s winners will be this year’s winners. Don’t chase performance. If it were that easy, my life would be a whole lot easier. But then again, I would probably be out of a job if all you need to do to guarantee this year’s winners is to pick last years winners.
  5. Value is back in vogue. In terms of management style, growth has been the leader for the last half of the 1990’s. When I look at growth versus value charts, the two lines have crossed once again and value has begun to outperform growth. I think we will see value investments make a sustained comeback, as the markets will benefit good fundamentals once again. A word of caution: please do not go out and shift your entire portfolio to value funds. A good portfolio will diversify into different management styles. Growth styles with bottom-up fundamental research should still remain solid.

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 and Clearpoint Benefit Solutions.

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