Go to Admin » Appearance » Widgets » and move Gabfire Widget: Social into that MastheadOverlay zone
It’s RRSP time again, only this year it’s a little different. The recent turbulence in the stock markets has left a lot of people wondering where they should be investing their money these days.
For the past several years it’s been a relatively simple decision. Buy stocks, especially U.S. shares. Then sit back and watch the money roll in.
It was easy to be complacent about the market. We went for two years without a major correction (a downturn of at least 10 per cent). The U.S. economy was gaining strength. Job creation is strong and wages are rising.
Whatever else you may think of him, we have a business-friendly president in the White House whose policies on de-regulation and cutting taxes have helped propel what was already a strong Wall Street market. With the major U.S. indexes hitting one new high after another, investors could be forgiven for being lulled into a state of complacency.
Then came two days of 1,000-plus point drops in the Dow and the return of volatility. Instead of a steady rise in values, indexes began to bounce around by hundreds of points within the space of a few hours. Fear started to overtake greed as the dominant motivating force.
Article Continued Below
That brings us back to your RRSP. My view is that fear should always be a factor in making investment decisions with your retirement money. The older you are, the more influence it should have on your choice of securities.
Here’s why. Your RRSP is a mini-pension plan and should be invested accordingly. That means risk should be managed carefully at all times. The goal is to achieve decent returns without exposing yourself to heavy losses if the stock market tanks.
For a younger person (up to age 50) I recommend your target should be to average 6 to 8 per cent per year. The maximum equity exposure should be 70 per cent, with the rest of the portfolio held in bonds and cash-type securities.
As you get closer to retirement, start scaling back your risk by reducing your stock market exposure and increasing the bond and cash weightings. By the time you reach age 65, you should have no more than 40 per cent of the RRSP invested in stocks or equity funds.
Yes, that will reduce your returns. But the last thing you need as you’re winding up your working career is to be overexposed to the kind of stock market meltdown we experienced in 2008.
So, where should you invest right now? With the stock market so unsettled and still overvalued, keep some of your money in safe securities. Rates on Guaranteed Investment Certificates (GICs) are still low but they should rise over the next few years.
A GIC ladder is a good place to start. Allocate the amount of money you want to invest and divide it by five. So, if you have $ 5,000, buy five $ 1,000 GICs that mature in each of 2019, 2020, 2021, 2022 and 2023. As each one matures, invest the proceeds in a new five-year certificate at what will presumably be a higher rate. You can shop for the best GIC yields at ratehub.ca.
For bonds, look for a mutual fund or an ETF from a well-established company with a good track record. The iShares Core Canadian Universe Bond Index ETF is a good long-term choice if you only want exposure to the Canadian market. For a well-regarded international bond fund, take a look at PIMCO Monthly Income, which is available both as a bond and an ETF.
There are a lot of choices available on the equity side, but in the current volatile conditions I don’t advise using ETFs to buy broad market indexes. Rather, I would go with actively managed funds from conservative companies. Beutel Goodman, Steadyhand, EdgePoint, and Mawer are among the best in this regard. Ask your financial advisor for more details.
A few years ago, I wrote a book titled RRSPs: The Ultimate Wealth Builder. In it, I described RRSPs as a wealth-building machine and pointed out how a monthly contribution of only $ 100 would build to almost $ 200,000 over 40 years at a 6 per cent average annual rate of return. Plus, any contributions are tax-deductible. It’s a great deal. Use it!
I’d like to end this column by thanking the many Star readers who wrote to express their condolences about the death of my daughter. Your thoughts and prayers were much appreciated in one of the most difficult times of my life. On behalf of my entire family, our thanks to each and every one of you.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.