- Have a plan: It is all too common that Canadians invest in “something” when they scramble to make their RRSP contribution before the deadline. Often, the “something” is an investment recommendation from an advisor that unfortunately results in a potpourri of holdings that turn out to be yesterday’s winners. This year, when investing your contribution make sure that you have a well-defined asset allocation strategy and refuse to invest until you or your advisor comes up with one.
- Park your contribution in a money market fund: A RRSP allows you to hold cash but while you wait to develop an investment strategy, invest the contribution in money market funds or cashable GICs. That way, you have the access to cash when you are ready to actually invest but you are earning something on your funds in the meantime.
- Ignore the ads: When money managers take out ads showing the excellent past performance of some of their mutual funds, you should remember that a) investors don’t get to earn past performance b) there is no correlation between past performance and future results and c) when retail investors jump on a trend, it is already too late to ride that train. So, this RRSP season, just ignore the glitzy ads and the drooling returns so prominently displayed.
- Check out low-fee options: Canadian mutual funds are notoriously expensive. The average MER of a Canadian equity fund is close to 2.5%. The math is simple - the higher the fees, the lower your returns. Fortunately, low-fee funds are available from many boutique money managers whose fees are substantially lower at 1.2% to 1.8%. By paying lower fees, your chances of earning higher returns than average increase substantially.
- Don’t hold too many funds: Many investors are under the mistaken impression that the more funds they hold, the better diversified they are. A handful of funds representing different asset classes will provide you with all the diversification you need.
- Consider indexing: Index funds simply track a popular index such as the TSX Composite or the S&P 500. Index mutual funds or Exchange-Traded Funds that can be bought and sold like a stock have the following advantages: a) low fees b) tax efficient because their turnover is typically very low c) since the vast majority of funds fail to beat their benchmarks, an index fund is likely to provide you with higher returns.
- Tread warily among these investments: In my opinion, it is best to stay away from these investments: principal-protected notes, labour-sponsored venture capital funds, funds that invest in narrow sectors such as biotechnology or energy or materials, funds that invest in narrow geographic areas such as China or India, mutual fund wraps etc.
Happy Valentine’s everyone!
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13 responses so far ↓
1 Steve Heath // Feb 14, 2008 at 10:26 am
I used to do money market funds with very little success (I think in 9 of 10 cases I wound up with around 99% of what I put in), and I contribute weekly, building up enough for another index fund purchase. I’ve found that the best combination for me so far, since I bank at President’s Choice Financial, has been to contribute into the high interest RRSP savings account (currently 4.1%) until I have enough to buy some stocks, and then I transfer it to the broker… PCF only charges $25 for a transfer, so I’m always ahead.
This probably wouldn’t be a good plan if you’re keeping some powder dry to move quickly, it takes 5-6 business days for the money to arrive at your broker, but for just regular accumulations it works for me.
2 Jon D. // Feb 14, 2008 at 10:29 am
2 things I like to always mention about RRSP contributions:
1.) There is no “deadline” to contribute despite what the ads say. You can always add to your RSP 365 days/year. There’s just a cutoff date for when it applies to the previous year’s taxes. (Ie. feb 29th ‘08 for 2007 tax year)
2.) There’s no requirement to claim RSP contributions in the current year. If you know your income is going to be exceptionally higher next year, and be in a different tax bracket, consider claiming it then.
3 Canadian Capitalist // Feb 14, 2008 at 11:05 am
Steve: That’s surprising. I’ve used MM funds extensively at RBC and TD and I don’t recall ever losing money.
Jon: You’re right, of course. I usually spread out my contributions throughout the year, so that I don’t get caught up in a last minute rush. Also, the window of contribution is 14 months from Jan to the first 60 days of the next calendar year.
4 Jamie // Feb 14, 2008 at 11:54 am
“…the window of contribution is 14 months from Jan to the first 60 days of the next calendar year”
Does this mean that if I contribute to my RRSP between Jan 1 2008 and Feb 29 2008 that it can be applied to either the 2007 or the 2008 tax return? I’m curious about this since my regular contributions from payroll have taken me very near my limit for 2007 and don’t want to go over so I’ve held off any contributions this month.
5 nobleea // Feb 14, 2008 at 11:56 am
Jamie;
it can certainly be applied to the 2007 tax return. Any future return as well.
6 Canadian Capitalist // Feb 14, 2008 at 12:34 pm
Jamie: In Schedule 7 of the tax form where you report the RRSP contributions, you report contributions made in March to Dec. 2007 in Box 2 and Jan to Feb 2008 in Box 3. Contributions reported in Box 3 can be applied against either 2007 or 2008 (assuming you have contribution room available). Unused RRSP contributions get carried over to future years in Box 14.
I participate in a RRSP at work as well and I simply apply contributions in the first two months for the same year, not the previous one.
7 ksin // Feb 14, 2008 at 12:50 pm
Please note,
I believe you can only carry forward RRSP contributions receipts if you have available contribution room. If you have maxed out your RRSP contribution room, you are only able to carry forward up to $2000 in over contribution. Any amount over this and you will be subject to penalties.
8 katie // Feb 14, 2008 at 3:57 pm
Why stay away from China or India fund? Actually right now I am thinking about buy some China/India fund. I have invested in emerging market for past few years, and the return is quite good. I believe China/India will continue to grow for a long time and Why not benefit from their growth?
9 thickenmywallet // Feb 14, 2008 at 4:44 pm
The most over-looked (and misunderstood) part of RRSP contributions is that you can simply park it in cash while you make up your mind on what to invest. Good to see you flagged this.
10 Canadian Capitalist // Feb 14, 2008 at 6:15 pm
katie: Please note that I didn’t say emerging markets. Emerging markets have weighting in World ex-Canada of 10% and a similar weighting in your portfolio is wise. For instance, the Sleepy Portfolio has a 5% allocation to emerging markets through VWO.
My personal opinion is that emerging markets are currently richly valued, so in my personal portfolios I keep the equivalent allocation in cash waiting for a suitable buying opportunity.
While you can reasonably argue that getting a broad exposure to emerging markets is warranted, my personal opinion is that investing in individual markets isn’t for the faint of heart. It’s true that past performance in India and China has been spectacular. However, that is a poor reason to jump in now. It is also true that these economies are boasting tremendous growth rates and are expected to do so in the future. But there is no correlation between economic growth rates and future stock market returns, so there is no reason to believe that high economic rates will translate into high equity returns.
11 GSB // Feb 23, 2008 at 12:30 pm
I posted this in another forum but am thinking that I will get more informed responses here.
In the last year, I have really been cracking down on my finances and am looking to significantly increase the amount I save or invest. The last item on the list below (Managed Growth Portfolio) is the only RRSP I currently hold and put a monthly contribution into. The other items on the list are ones that I figure have done or are doing well.
[IMG]http://img402.imageshack.us/img402/6044/cibcmutualfundsnz5.jpg[/IMG]
[B]The situation[/B]: When I first started contributing to RRSPs, I went into the bank without a clue and basically had the guy at CIBC tell me what to invest in, I said it was for long term (probably 30 yrs). I am risk tolerant but my wife is not and wants something stable so I was hoping to develop a nicely compromised portfolio that we would both be happy with. I am 30 yrs old and I will receive a government pension in approx 10 - 20 yrs depending on how long I want to work and am probably looking at approx $1500/month to invest.
I realize that most of the items in the list above are from CIBC’s higher risk growth funds and that the fund I currently hold (Managed Growth Portfolio) is a collection of different growth funds combined.
1. What else should I be doing to diversify in order to balance out the higher risk funds?
2. Should I scrap the Managed fund and piece together my own portfolio out of the others that I have pointed out in the list above?
3. Is it really stupid to invest solely in different CIBC “growth” funds?
4. I don’t necessarily want to have everything that I invest to be in an RRSP, what are some other strategies I should be considering?
5. I have read from a lot of sources lately that Index funds are the way to go, is that the same as me picking, for example, CIBC European Index RRSP from the list above? Or is it not the same thing?
6. Is it safe to keep everything within CIBC, which I only do for simplicity’s sake?
7. Can anyone offer up some good “rules of thumb” such as percentages of what to invest in? ie. XX% to RRSP, XX% to Non registered (and what exactly), and XX% to XYZ.
I intend on going to see a financial planner but just want to learn a few more things and do some more research on my own before going so that I have a better idea of what I want done. I can get a good deal through work with [URL="http://www.sisip.ca/en/index.asp"]SISIP Financial [/URL]($5/month w/ free tax returns), they don’t work on commission. Does anyone have any thoughts on if it is a good or bad idea to use them?
12 Mortgage Refinancing » Blog Archive » Weekend Reading - Feb 22, 2008 // Mar 8, 2008 at 5:31 am
[...] Canadian Capitalist has the perfect article for the current RRSP season (deadline is Feb 29, 2008) called "Tips for your RRSP Contribution". ; My favorite tip is "Park your contribution in a money market fund". ; This will allow you to take advantage of the contribution tax break, but give you some time (and a little growth) while deciding how to invest the money. ; [...]
13 Alan Smithee // Apr 6, 2008 at 1:37 pm
The problem with ‘parking’ in a cash or mmkt fund is that the typical investor who does this, do so every year. What tends to happen is that they are procrastinators who take their cheques to whichever bank (a) has the best ads, or (b) can give them a last-minute appointment. Having beat the deadline, the investor feels satisfied with having made their contribution before the deadline, but then typically doesn’t revisit their decision until months, often years, later. By then, their portfolio has a ragtag collection of low-interest bearing investment instruments from different firms. Clearly the best way is to contribute on a regular basis: through payroll if your company can facilitate the payroll deductions or through a pre-authorized payment plan through a brokerage firm FP or Advisor. The best time to revisit is May to December after the RRSP and tax rush and over the summer months when you have time to make careful and measured decisions.
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