RRSP funds for nervous investors
People are certainly nervous about investing these days. As a result, a degree of paralysis seems to have taken hold when it comes to financial decision-making.
For evidence, just look at the results of a survey on RRSP intentions for this year, which was conducted for Toronto-Dominion Bank. It showed a whopping 20 per cent drop in the amount of money people intend to contribute to their retirement plan in 2003. Moreover, those who do contribute are clearly opting for safety over growth potential. The survey showed that only 26 per cent intend to invest in equity mutual funds this year, down from 48 per cent last year. Conversely, the number who plan to put their money into GICs rose sharply, despite the fact that five-year certificates are only yielding around 4 per cent.
Danger in going to extremes
This penchant for caution is understandable, given the lousy markets of recent years. But there is danger in going to extremes. A return of 4 per cent is not going to build an RRSP very quickly. Right now, it isn’t even going to keep pace with inflation, which at last report was running at over 4 per cent annualized. The CPI rate should fall this ar, but even if we get back to the 2 per cent range that doesn’t leave room for much real growth in a GIC-based RRSP.
Your RRSP is a long-term commitment. So you need to think long-term in making your decisions. If you want to put a portion of your contribution into a low-yielding GIC because of the safety it offers, fine. But I wouldn’t exceed 25 per cent.
Next page: Low-risk mutual fund picks
Low risk mutual funds a good contribution
Put the rest of the money into a mix of low-risk mutual funds. If you want to be ultra-conservative, here are three suggestions drawn from Gordon Pape’s 2003 Buyer’s Guide to RRSPs. All are balanced funds that invest in a combination of stocks and bonds and are particularly well-suited for smaller RRSPs with limited assets. They are all conservatively-managed, with a sound historical record.
Trimark Income Growth Fund. Rating $$$$. The revival of value investing also revived the fortunes of this fund after it spent several years wandering in the wilderness. The portfolio is broadly diversified, with an almost even split between stocks and bonds at the end of November 2002. Stock selection tends more toward value than growth, with emphasis placed on issues that are attractively priced in relation to historical earnings and valuations. Results have been steadily improving, and the one-year gain to Nov. 30 was a very respectable 4.7 per cent (SC units), one of the best in the category.
That result pulled up the three-year average annual compound rate of return to 11 per cent which has to make investors extremely happy in the light of the volatile market conditions that prevailed during that time. This fund comes with two purchase options and we strongly recommend the SC units, which have a much lower MER. That makes a big difference to your net return; the one-year gain for the DSC units to Nov. 30 was almost a percentage point less than that of the SC units, at 3.8 per cent. Ask your financial advisor to acquire the SC units for you with a zero front-end load. Many will now do this for good clients.
Harbour Growth & Income Fund. Rating: $$$. This fund’s name should be taken literally. Its first aim is growth, with income secondary. This is an asset allocation-driven fund, which means that the manager, Gerald Coleman, decides first on what proportion of stocks, bonds, and cash to hold and then makes his securities selections on that basis. As of the end of November, the fund was 46 per cent invested in stocks and less than 6 per cent in bonds, with the balance in cash. In other words, a very conservative mix. The average annual return for the three years ending Nov. 30 was a well above-average 9.7 per cent. The fund has had only one losing calendar year, in 1998 when it dropped. 1.2 per cent. It’s part of the CI group.
Mackenzie Ivy Growth & Income Fund. Rating: $$$. This entry has evolved into a true balanced fund since Jerry Javasky assumed portfolio responsibility in 1997. Returns are well above average for the Canadian balanced category, with better-than average risk. The fund made a slight profit in 2002, and shows an average annual compound rate of return of 7.3 per cent over the three years to Nov. 30. That’s a lot better than a GIC. Nervous investors will be especially interested to learn that this fund has only lost money once over a calendar year and that was back in 1994 when it dropped a fractional 0.7 per cent.
Adapted from Mutual Funds Update, a monthly newsletter that offers advice on building winning fund portfolios and recommends specific funds for all types of investors. Three-month trial subscription is only $9.97 plus tax. Details at http://www.buildingwealth.ca/promotion/50plusproducts.htm