RRSP ABCs: Tips for Investing

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RRSP investment tips | BCBusiness

Stocks, bonds, ETFs or mutual funds? Buy, sell or sit on my cash? Here's some advice to help take the angst out of investment decisions in uncertain times.

It’s RRSP season and investors are bombarded with advertisements urging them to make their contributions to all kinds of investments. The choices can be overwhelming, particularly with volatility and global debt problems affecting capital markets. The two most common questions I hear are: What investments is Leith Wheeler recommending, and Should I park the money in cash, then invest when things settle down?

The answer to the first question is “it depends”—not the most satisfying response for investors seeking a short-term solution to challenging markets. But long-term investors do not invest in the current fad. I ask my clients, What has changed in your circumstances over the last year? If nothing dramatic changed, I recommend clients use their RRSP contribution as an opportunity to rebalance their portfolio to their target asset mix. If they are approaching retirement and/or will begin to draw income from their portfolio in the next few years, I might suggest using the new contribution to adjust the asset mix to a more conservative one if necessary.

The second question essentially asks if I try to time the market. This is difficult for anyone to do well. You must get both the timing of the sell and the buy-back into the markets right. As a value investor, I feel the best approach is to buy when stocks are inexpensive. If investors sit on the sidelines during volatile markets until they feel comfortable, they risk missing the market recovery. Studies have shown that retail investors’ portfolios consistently perform worse than the mutual funds they hold, due to attempts to time the market.  Investors make market-timing decisions based on past events, but markets are forward-looking; investors need to make decisions on future events. Stories that are on front page of the papers are already reflected in stock prices, so don’t try to outguess the market in the short term.

Another challenge is today’s historically low interest-rate environment. If you park your money in a GIC, money market fund or high-interest savings account, you will lose; the returns won’t keep up with inflation. Unless you have a specific upcoming need for the funds, you will pay a big price for safety or indecision.

Bonds are part of many investors’ portfolios; they provide regular income and can offset some of equity market volatility. But the bond outlook in the next few years is significantly lower than it has been in recent years. This doesn’t mean investors shouldn’t hold bonds, just that they should pay attention to the type of bonds in their portfolio. Government bonds don’t look that attractive now.

Dividend-paying stocks and REITs are commonly touted as a great option for investors today, but not all are created equal. Securities with a high dividend or payout rate can’t necessarily sustain or grow that payout. Over the longer term, what appears to be a lower yielding investment may be a better option. In the case of REITs, it is important to consider whether the underlying company will be able to continue to pay out if the housing market falters or if credit tightens, for example. Always look beyond the posted yield.

Although investors are nervous right now, equities are reasonably valued, and well-managed companies with consistent earnings will perform well over the long term. We aim to buy stocks when they are mispriced or undervalued. Patience, a long-term view and adherence to a disciplined, value-investing style is the best way to protect and increase your portfolio’s value over time.

 

Karey Irwin, CFP, is a vice-president and portfolio manager at Leith Wheeler Investment Counsel Ltd. in Vancouver. The article is not intended to provide advice, recommendations or offers to buy or sell any product or service.



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