Where to put your RRSP money

It’s been four years since we faced an RRSP season so filled with uncertainty.

The last time was in early 1998, when the world was reeling from the collapse in Asia and the stock market crash of October ’97.

Things aren’t quite as dramatic this time, although the bursting of the high-tech bubble last year hit many people hard. But while we don’t have an international crisis to contend with, there are plenty of storm signals flying.

The odds are against a recession this year, but they appear to be shortening. At the very least, we should expect a slowing growth rate which will continue to put pressure on corporate profits.

Hopefully, that will be accompanied by an easing of inflationary pressures. The worst case scenario would be to have inflation continue at its current pace while the economy slips back to neutral.

Difficult to predict
At this stage, it’s difficult to predict how 2001 will unfold. A lot will depend on the acumen of the Bush administration and the new president’s ability to deal with Congress. If the U.S. leadershiis perceived to be floundering, that will send a negative signal to world stock markets.

Conversely, a strong debut by Bush coupled with some delicate fine-tuning by the U.S. Federal Reserve Board would be bullish for the economy and the markets.

In terms of your RRSP, it all adds up to a cautionary message.

  • You should never take undue risks in your retirement plan, even during the best of times. But this year, especially, is a time for prudence.
  • The emphasis should be on capital preservation, not on big gains. If you can coax out a return of 7 per cent to 10 per cent over the next 12 months, you should be quite content with your performance.
Fine tune allocations
The place to start is with your asset allocation. Many RRSPs have become too aggressive over the past few years. If that’s the case with your plan, you should do some fine-tuning now. It may not be necessary to actually move assets around within the plan. You can adjust the allocation simply by directing new contributions to those categories that are currently underweighted.

For example:

  • Your plan may be light on fixed-income securities because you loaded up on equity funds while the stock markets were hot. Now is the time to remedy that.
  • If interest rates decline in 2001 as expected, that will be good news for bonds which have rallied strongly in recent months. In fact, it’s quite possible that bond funds will outperform stock funds this year.
  • By investing most of your new contribution money in fixed-income securities, you’ll make your RRSP more defensive without giving up a lot of short-term profit potential.

Here is our recommended basic asset allocation for balanced RRSPs in 2001:

  • Cash            10 per cent
  • Fixed-income  40 per cent
  • Growth             50 per cent

Choosing funds
Now it becomes a matter of which funds to choose. As a starting point, you should include at least one good middle-of-the-road bond fund in your RRSP. Choose one with no sales commissions and a low MER.

  • The Phillips, Hager & North Bond Fund on our Recommended List is perfect. However, the high minimum ($25,000 to open a PH&N account) makes it impractical for many people.
  • The Perigee Index Plus Bond Fund is a good alternative, with a more reasonable $2,500 minimum.
  • If that’s still too high, try the TD Canadian Bond Fund which you can buy for a minimum of $100 in an RRSP.

Geographic mix
If you are following our basic asset allocation formula, half your RRSP will be in growth securities. Based on that, we recommend that you invest 20 per cent of your total plan in Canadian equity funds, 20 per cent in U.S. equity funds, and 10 per cent in international funds.

Alternatively, part or all of the U.S./international component may be held in the form of global funds which invest throughout the world (pure international funds do not invest in North America).

Your goal here should be style diversification. At its most basic, this means you should have at least one value fund and one growth fund from each geographic area in your mix.

Canadian funds
Looking at Canadian equity funds:

  • On the value side, AIC Diversified Canada and Ivy Canadian, both on our Recommended List, fit the bill nicely.
  • Other good choices include Perigee Canadian Value Equity and Synergy Canadian Value. 

Growth funds have been hard-hit recently, but you would not want your portfolio to be without them over the long term. Sound choices from our Recommended List include:

  • Fidelity Disciplined Equity
  • Synergy Canadian Momentum
  • Bissett Canadian Equity
  • The Mclean Budden Canadian Equity Growth Fund is an excellent no-load choice, but the minimum initial investment of $10,000 will be out of the reach of many.
  • Altamira Equity is a lower-cost no-load option.

Apply this same approach to choosing your U.S. and international equity funds and you’re on your way to a winning RRSP portfolio.

Abridged from the January 2001 edition of Mutual Funds Update, a monthly newsletter edited and published by Gordon Pape. For a free three-month trial subscription to the electronic edition: http://gordonpape.fifty-plus.net/FreeMFU.html