The RRSP Season has already started and while most financial advisors are still thinking about their Holidays, some others are calling their clients to book appointments. So you might (or might not!) get a call this week to make your RRSP contribution in the days ahead. Regardless if you are dealing with a good financial advisor or not, you should definitely start investing for your retirement as soon as possible.
Since you don’t have access to track investment apps or high quality investment services, you need to do your own research before you meet with a financial advisor. This is why it is so important to prepare for your meeting beforehand so you can have an idea how you want to invest your RRSP contribution. In this article, I have listed a few 2010 RRSP investment ideas that you can discuss with your financial advisor. Please note that those are not recommendations but simply investment ideas to help start the discussion.
If you are a beginner investor and you are looking for your first RRSP contribution, I suggest you go with a “packaged” investment product created by your financial institution. While the management fees (that are being taken off the top of your investment returns (profits or losses) are higher than other types of investment solutions, this is a great place to start in the investing world.
Diversified mutual funds will allow you to invest in several types of assets (money market, government and corporate bonds, Canadian, American and International stock markets) and will always remain invested according to your risk tolerance, investment horizon and specific goals.
If you know more about the stock market and you want to pick specific funds, you can build your own mutual funds portfolio. While I don’t think it is a great idea for most investors (many think that they can manage on their own but it is usually a big mistake), you can go on investing sites (see my articles about 9 free Canadian Investing websites for links) and pick the best performing mutual funds. Make sure to pick funds that have a long track record, relatively low management fees (MERs), that are part of the 1st or 2nd quartile over 5 years + and that the management team has been in place for a while (you can look at the reasons to sell a mutual funds in this article).
When building your own portfolio, you must be careful about front end and back end fees (fees when you buy or when you sell). You might want to build your portfolio with a financial advisor in order to make sure you make the right decisions. Another important thing is to rebalance your investment according to your original asset allocation. While the diversified mutual funds do it automatically every 6 months, you will have to transact by yourself in a homemade portfolio. So building your own portfolio might not be a bad investment idea but it surely requires more knowledge and more time. A humble person once said that the more they know about the markets is proof that he does know much.
If you are a beginner in the world of ETFs and you have a decent amount to invest (more than $25,000), you should try to contact a broker. The problem is that you may have a hard time finding one if you are just starting to invest. They are usually go after bigger accounts (this is too bad, but it is the name of the game).
If you still want to trade ETFs nonetheless, I suggest you open a brokerage account (for example Quest Trade since they have one of the least expensive transaction fees) and start with market index ETFs (ETFs replicating the Canadian Stock Market or the US Stock Market). As a beginner investor, I would not go this route but if you have been investing for a few years, it might be the right time for you to look at this option.
For this investment idea, we are entering the world of speculation. Nobody knows which sector will outperform the stock market index this year. From 2003 to early 2008, the financials, resources and emerging market were pushing investors to the highest yields they might have ever seen. Yet, these went down dramatically during the credit crunch. This is why it is very risky to predict the future.
Nonetheless, you can find specialized mutual funds and ETFs concentrated by industries. The easiest way to find them is by using sites such as Morningstar or GlobeInvestor (then again, I suggest you take a look at my article about free investing websites for more options).
Trading ETFs will reduce your investing fees to the minimum but you will follow the major trend of a specific industry. On the other side, specialized mutual funds are pretty expensive in term of MERs but you can benefit from the experience of professionals. In niche sectors, I think it is easier to beat the market since the number of companies to follow is smaller.
Certificates of Deposit will barely cover for the upcoming increase in inflation and you won’t do much with your investment with a return of 1 to 2%.
On the other hand, bonds could be a better investment idea but prepare yourself to experience a drop in the value of your bond portfolio in 2010-2011. Bonds values go down when interest rates go up, therefore, you will see a temporary drop in your investment values if you hold bonds. However, this will come back to normal at maturity (you still get your money back at the end 😉 ).
If you are looking for more investment returns but you are not willing to see your investment yield goes negative, linked notes and variable certificates of deposit might be a great investment idea. As I mentioned before, I don’t really like linked notes because you pay a high price for your capital security. However, sometimes the peace of mind is more important that making money. And this is why banks offer the possibility of guaranteeing your investments while expecting higher yield since your investment is linked to the stock market. This would not be my first choice but it is definitely the best alternative to classic certificates of deposit.
Whoa! I usually don’t write posts this long but I thought it was important to provide some RRSP investment ideas before the madness starts in February!
What will be your investment choice for this RRSP season? Will you stick to your plan? Change your investment picks?
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