This year’s RRSP deadline for 2010 contributions is March 1, 2011. The maximum contribution for this year is $22,000, though you personally may be capped at something higher or lower than that: Check your most recent Notice of Assessment from Canada Revenue Agency for your own personal limit, including any unused contribution room. But getting your money into an RRSP is easy. What about managing it once you’ve made a contribution?
A few years ago, a survey by the CFA Institute found the single biggest mistake Canadian investors make was in managing their investment holdings. Fully 47.3% of Canadian CFA charterholders said that chasing past performance was by far the biggest problem. Improper asset allocation and diversification made up another 21.0%. Alternative choices, ranging from focusing too much on the short term, to the failure to sell losing positions and selling winners too quickly, to not rebalancing their portfolios, garnered much smaller percentages.
It’s really not difficult to invest properly, or at least to avoid the biggest mistakes. Chasing past performance means buying last year’s winners. Metals and mining stocks have led the TSX Composite’s sector indexes for the past two years. So not being overweight right now in Canadian metals and mining is the right way to go. Simple.
The asset allocation/diversification issue is also solved fairly simply. If your portfolio contains cash and equity funds, even though you know it should also contain some bond funds, buy a bond fund – don’t just think about it. And diversification: Mutual funds are an excellent way to accomplish that, as long as you don’t buy different funds that all focus on the same stocks. So make your RRSP contribution now and leave the rest for later, but later make sure your funds don’t all own the same securities.
The survey also found that a full 44% of respondents said they’d tell investors to “stop worrying about investment performance as often.” Another 26% said they would get their clients to invest more often, or allocate more of their income to savings rather than current consumption. And 14% would also encourage their clients to put less emphasis on the real estate market as part of their overall investment plan.
For now, just make your contribution if that’s all the time you have. But when you come back later to look at your plan, remember it’s not that hard to become a better investor by following some of the above points.
For novice investors, with a longer time horizon, your best approach is to hold cash, a diversity of bonds, and a diversity of stocks. But if you don’t have a lot of money to spread around the market, exchange-traded funds (ETFs) are the perfect fit. They allow you to add each component in small increments and prepare you for more sophisticated security investing later on if you wish.
For the Canadian equity component, I would start out with the iShares S&P/TSX 60 Index Fund (TSX: XIU). This fund has been around since September 1999 and has some $11.2 billion in assets. It is RRSP-eligible and has an MER of 0.15%. It currently ranks 159th among 404 peers in terms of overall performance.
David West, CFA, FCSI, has more than 25 years’ experience in the financial services industry as an adviser, trainer, writer and commentator. He is a columnist for The MoneyLetter and Canadian Business Online among others, and is a regular contributor to FundLibrary.com.
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The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.