RRSPs: First Do No Harm

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Think of your RRSP as a pension plan, perhaps the only one you’ll ever have. Then make your decisions accordingly.

RRSP investors face a tough challenge this year. With stock markets in turmoil and interest rates still near levels not seen since the Great Depression, where should you put your money?

Nothing looks very attractive. Despite the recent rally, the TSX and all the New York indexes are in negative territory after the first two months of 2016. Overseas markets aren’t faring any better. France, Germany, Switzerland, Japan, Hong Kong, and India are all in correction territory with year-to-date losses of over 10 per cent.

On the bond side, short-term yields are approaching zero. According to the Bank of Canada website, as of Feb. 25 the average yield on three to five year Government of Canada bonds was only 0.52 per cent. For five to ten year bonds, it was 0.88 per cent. No one is going to build an RRSP very quickly with returns like that.

In this situation, it’s a good idea to remember the prime rule of the medical profession: “First, do no harm”. Your RRSP is a pension plan, for some people the only one they’ll ever have. That means protecting your assets. It can take years to make up for major losses and they are not tax deductible. So preservation of capital must be a primary goal and the older you are, the more important that becomes.

It’s rarely a good idea to tear an RRSP portfolio apart unless it has been poorly designed and carries a higher degree of risk than is appropriate for a pension plan. Instead, I suggest gradually changing the composition of the plan as needed through careful allocation of new money.

This year, that suggests adopting a very conservative approach. For example, I normally don’t like to hold a lot of cash because it produces a negative return, once inflation is taken into account. But at this moment, keeping some or all of this year’s contribution in cash until the markets settle down is not a bad idea.

Guaranteed investment certificates are another almost risk-free option. The returns are low but at least they are positive. Avoid the major banks, which are paying almost nothing for your money right now; RBC is offering just 1.5 per cent for a five-year term. You can do much better at a smaller financial institution where five-year rates are as high as 2.5 per cent (e.g. AcceleRate Financial, Achieva Financial, Hubert Financial, MAXA Financial, Oaken Financial). Just be sure your money is protected by deposit insurance.

Bond funds are another option to consider, although they entail somewhat more risk. The iShares Canadian Universe Bond Index ETF (TSX: XBB) was showing a year-to-date gain of 0.78 per cent at the time of writing. The five-year average annual compound rate of return to Jan. 31 was 4.69 per cent. Especially important in the context of safety is that when the fund takes a rare dip into negative territory, the loss is minimal. Since its launch in late 2000, the worst 12-month period was a decline of 1.91 per cent in the year ending Sept. 30, 2013.

For those who prefer mutual funds, the Phillips, Hager and North Total Return Bond Fund has a similar record.

Any fund with exposure to the stock markets obviously comes with a higher degree of risk. There’s also more opportunity for gains, of course, but current conditions suggest restricting new purchases to non-registered accounts where a capital loss can be claimed if things turn sour.

If you really want to add equity exposure to your RRSP at this stage, I suggest a global balanced fund to keep the risk to a minimum. The Mawer Balanced Fund is an excellent choice. It was showing a four-year average annual compound rate of return of 12.31 per cent to Jan. 31. The MER is a very reasonable 0.93 per cent, not much more than an ETF.

If the Mawer fund is not available to you (not all advisers offer it as it does not pay trailer fees), look at the Fidelity Global Monthly Income Fund B units (FID1222). Despite a much higher MER of 2.29 per cent, its performance record is comparable to that of the Mawer fund. However, it has shown slightly more volatility over time.

The bottom line is that the current circumstances dictate using a low-risk approach when investing your RRSP money this year. There are times to be greedy when choosing your investments. This isn’t one of them.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.

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