RRSP seasons aren’t what they used to be. You may remember the 1980s and 90s when they were a big deal. Banks stayed open late so we could get our contributions in, and there was advertising coming at us from all directions.
Today, the hoopla isn’t there, but January and February are still the busiest months for investment firms. RRSP and TFSA contributions are a part of that, but it’s also a time when investors sit down and evaluate their portfolios. They have their annual account statements in hand, and more indoor time to consider next steps.
In the spirit of the season, here are some things to think about this year.
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Old or new?
Investors are often looking for something new to buy when making contributions. They want the latest and greatest.
This tendency is apparent when I see portfolios with a multitude of holdings. They are like time capsules. I can link the holdings to what was being sold in specific RRSP seasons such as technology in the late 1990s, energy in 2008, and more speculative holdings like cannabis and Bitcoin companies in 2018.
A new stock or fund may be the answer, especially if an additional piece is needed to properly diversify your portfolio (we see too many portfolios that are solely focused on the domestic economy). But the RRSP deadline (March 1 this year) shouldn’t cause you to rush into buying something that duplicates what you already have, or you don’t understand.
Indeed, your first step should be to look at what you already own. If you like your portfolio, you may simply add to your major holdings pro-rata, or focus on a stock or fund that’s been underperforming and needs topping up.
Staying on track
Speaking of topping up, contributions are useful for re-balancing your overall portfolio back to its intended asset mix. I say “overall” because it’s important that you bring into the equation all assets that are dedicated to retirement. This might include GICs, non-registered accounts, income properties and pensions.
This is an important concept: By adding to your registered accounts, you have an opportunity to rebalance the entire portfolio.
Last year was a good example of where rebalancing came into play. If you did nothing to your portfolio in 2018, you likely started 2019 underexposed to stocks relative to your target. That’s because they were down in 2018 while cash and bonds held steady. When the recovery started over the holiday break, your portfolio held a smaller percentage in stocks than it did during the decline. Going up with less than you went down with is a sure way to reduce your returns.
Many investors fail to consider their company or government pension plan when investment planning, even though it may be their biggest asset.
Every situation is different, but in general, if you have a defined benefit plan that is well funded or backed by government, it’s reasonable to categorize it as fixed income for the purposes of setting your asset mix. This allows your other investments to be more equity oriented.
For Group RRSP and Defined Contribution plans, your fund choices should match up with the goals, risk tolerance and time frame you’re using for your other accounts. If your employer doesn’t have an option that fits your situation, you can make adjustments using your other accounts. For instance, if you’re in your 30s or 40s and are only offered a balanced fund, you could tilt your personal assets towards stocks. The result will be a more growth-oriented portfolio that’s appropriate for your situation.
Eliminate the season
The most effective RRSP strategy is to develop a routine that eliminates future RRSP seasons. If you make contributions throughout the year, your money starts working for you sooner and you needn’t worry about deadlines.
Automatic monthly contributions are one of the simplest and most effective investment strategies available. The money is gone from your bank account before you can spend it, your emotions stay out of the way and the cost of your annual contribution is averaged across a variety of markets.
Hype or no hype, this time of year is a great time to tune up your portfolio, and RRSP and TFSA contributions are handy tools to make any adjustments.
Tom Bradley is President of Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at [email protected]