We are nearing the end of the RRSP rumble and you only have 2 weeks left to make your RRSP contribution for the 2009 tax year. But before you run like a crazy horse to the bank and ask for their best rate on a 5 year certificate of deposit, let me give you a few tips to investing inside your RRSP:
It is true that you only have 2 weeks left and most financial advisors will be pretty busy during this rush. However, if you don’t have much time to give to your retirement planning, you won’t have much money with which to retire when you are 65! In the worst case scenario, call your banker and ask for an RRSP contribution that is not “locked”. He will deposit your money in an “RRSP cash account” that you will need to invest wisely later on, in the meantime you can get your tax receipt for 2009 right away. However, during the same phone call, I strongly suggest you schedule an appointment in March. You don’t want this money to stay in limbo forever!
Since I have already produced a series on how to find a good financial advisor, I’ll let you read it (start with part 1 here). It is very important to deal with someone you trust and that is available.
Famous investor Warren Buffett once said that he doesn’t invest money in something he doesn’t understand (techno’s during it’s bubble, ABCP, etc 😉 ). Well you should do the very same thing! Ask how your money will be managed, how much you will pay in fees, if there are transaction fees and how you can read your investment returns. If your financial advisor sounds evasive, leave him or change the product but don’t waste your time 😉
Some people have the bad habit of pickings funds here and there according to their mood. Do you know that 90% of your investment yield is correlated to your asset allocation and not to market timing or the selection of investment products? Make sure that your asset allocation covers several asset classes and that it is linked to your investor profile.
Then again, if you don’t ask questions and you don’t look at your asset allocation, you may fall into the flavour of the month. Some products will be “pushed” by some financial advisors. They may be good for you, they may not be. Therefore, ask how this investment product fits within your retirement plan?
It is always tempting to follow the herd and invest in the “hot industry” of the moment. Some people are very attracted to Canadian banks or to commodities (gold, oil, etc.). I am not say that you shouldn’t have financials or commodities in your RRSPs, but I seriously think that you should consider your asset allocation first!
If you have 100K or more, don’t bother having more than 5-7 funds. Over this amount of funds, you are over diversified or you are just paying MERs for nothing. If you have a small amount to invest (a few thousand), your best bet is to take a package of mutual funds since they are balanced according to your investor profile and you don’t have to mess around with 10 mutual funds. Too much diversification is called diworsification 😉
I think you should not invest the equity portion exclusively into the Canadian market. It would be a great idea to look at the US and global markets. However, if you do so, ask if your investments will be hedged against currency fluctuations. For example, someone who invested in US dollars from 2003 to 2007 didn’t make much once converted into CDN dollars. While the US market jumped by more than 30%, our dollar also jumped with the very same proportion compared to the US dollar. What you made with the right hand, you lost it with the left one.
You can’t stand the market anymore and you are only looking for secured investments in your RRSP? This is fine but be careful of locking your money for a 5 years term at 3%. If inflation comes back (and it will!), you will get hit by a train and you won’t make money for 5 years. If you go with bonds and certificates of deposit, you are better off with a bond ladder to mitigate your interest rate risk.
image source: ansik
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