Money Smarts: 6 Rules for a Successful RRSP
Anyone can earn a respectable return in an RRSP over a period of time by following some basic investment rules and choosing their securities with care.
Here’s what you need to know.
Rule 1: Diversify
Never put all your eggs in one basket. Diversification is critical to success. Make sure all three core asset groups are represented in your portfolio: cash (I suggest 5-10 per cent of the total), bonds (25-35 per cent), and stocks (50-65 per cent).
This is a relatively defensive asset mix, with a maximum of two-third of the RRSP exposed to the stock market. That brings me to the second fundamental point of RRSP investing.
Rule 2: Don’t lose money
Think of your RRSP as your personal pension plan and make investment decisions accordingly. This is not a place to gamble with your money; if you want to invest in speculative penny stocks do it in a non-registered account where at least you can claim a capital loss if you guess wrong.
RRSP investing requires careful risk/reward analysis. Your goal is to choose securities which, in combination, will generate a decent return without placing you in harm’s way when stock markets go into reverse. That does not mean you will never lose ground. But any losses should be small and temporary. Over time, an average annual compound rate of return in the 6 per cent range should be achievable.
Rule 3: Don’t invest in what you don’t understand
The third basic rule of RRSP investing is to avoid securities you do not understand. The brilliant financial engineers on Bay St. and Wall St. are constantly creating flashy new products that in some cases are so complex that even experienced financial advisors have trouble explaining them to clients. Often, these products are designed to sell by offering high commissions to brokers and undeliverable promises to investors, such as betting on the stock market without risk. Most should be ignored. There are plenty of easy-to-understand alternatives from which to choose.