Let's say you have decided that an RRSP is the right thing to do. Now you must decide what to invest in. This decision can be equally daunting. Here are my top 10 tips for investing in your RRSPs:
- Have a plan (asset allocation). Far too often, investors are making investment decisions without a plan in place. There is a science to investing and understanding the disciplines to investing can dramatically reduce risk and enhance returns. Far too often, investors employ the “wing it strategy”, adding a little of this and a little of that.
- Diversification. Diversification is the golden principle of investing. Make sure you do not get over exposed in any sector, geographic region, financial institution or investment.
- Don't give up on equities. This last year, the bear market scared investors and caused them to invest in cash, GICs, Money Markets and Bonds. Many experts feel that markets should improve in 2002. Many fundamentals are in place and we just need a little investor confidence to fuel the markets. Don't give up on the equities because it may be the worst time to sell. Employ a little patience and you should be rewarded.
- Maximize your foreign content. Most of the best opportunities exist outside Canada. You are allowed to have 30% of your RRSP plan invested outside Canada. Recent studies have shown that most Canadians have not maximized their foreign content, be sure to maximize this.
- Use RRSP eligible clone funds. In some cases, it may be better to have more than 30% of a portfolio invested outside of Canada. Today, there are many investments that are global but also 100% RRSP eligible. These investments are definitely worth considering for your RRSP.
- Don't chase performance. We've spent a lot of time researching flows of funds and we have found that last year's best performing investments are usually, this year's best selling investments. Unfortunately, the reality is chasing performance does not work. If it were that easy, we would never have to worry about making bad decisions.
- Avoid over-diversification. As the mutual fund industry matures, there are more and more mutual fund options available to investors. While it is important to make sure you are properly diversified, you must also be conscious of not being over diversified. Too often, I see investors who keep adding new funds to their portfolio year after year and before they know it, they have too many funds. Many experts agree that you should have between 3 to 12 funds and that should be enough for proper diversification. The key to avoiding over diversification is to have a plan.
- Take the time to understand your risk budget. Risk and return go hand in hand. Make sure you take the time to understand how much risk you are willing to take. I've spent a lot of time talking about risk in my book trying to understand what risk means. Understanding risk and your risk budget is the key to help you make more prudent investment decisions.
- Avoid market timing. Market timing is the most difficult aspect of investing. In fact, I do not believe anyone is able to time the markets effectively with any degree of accuracy. Market timing more often leads to failure than success. If you must market time, try to find a more active mutual fund manager who is able to trade with greater expertise, time and resources.
- Invest with logic over emotion. Emotions always get investors in trouble. They tend to buy and sell at the wrong times. Emotions cause investors to buy high and sell low. Do your best to remove emotion out of the equation. Do your homework and remember good research leads to good decisions.
To some investors, this may appear to be common sense. Unfortunately, common sense is not common enough. Employ these tips and you will reap the rewards over time. Good Luck!