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% of the total), bonds (25%-35%), and
This is a relatively defensive asset mix, with a maximum of two-thirds of
the RRSP portfolio 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 that, 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 compounded rate of return in
the 6% 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.
Rule 4: Keep costs low
The next basic rule is to keep costs low. High expenses eat away at your
bottom line. So, avoid excessive trading within the RRSP (remember,
brokerage fees are not tax-deductible if incurred within a registered
plan). And stay away from most high-MER mutual funds. I say “most” because
there are a few exceptions where the manager earns his/her outrageous pay
by consistently delivering superior performance.
Rule 5: Pay attention
Next, pay attention to your plan. While I do not encourage frequent trades,
neither do I recommend an “invest-it-and-forget-I” attitude. There is too
much volatility in the markets and too much economic uncertainty right now.
You need to keep a close eye on the situation and, when necessary, adjust
your asset mix and the securities you hold. At a minimum, review your
Rule 6: Keep it going
Finally, keep contributing. This may seem like I am stating the obvious,
but the reality is that on a percentage basis, fewer Canadians are
contributing to an RRSP each year. I realize that finding money for an RRSP
is not always easy, especially if your household budget is stretched to the
limit. But there are things you can do if you’re really serious about
One way is to earmark some of any windfall money you receive for your RRSP
– say 25% at a minimum. Windfall money can include everything from a tax
refund to a salary increase. Another strategy is to set up an automatic
deduction plan at your financial institution. Arrange to have a specific
amount withdrawn from your account every month and credited to your RRSP.
Even if you can only afford $50 a month, it’s a start and you can gradually
add to it each year.
If you don’t put any money in the plan, all the other advice is useless.
is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
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Notes and Disclaimer
© 2019 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
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