Stocks, bonds, mutual funds: What’s right for your RRSP?
Making your annual contribution to your RRSP is just the start of retirement planning. The next step is making sure your RRSP portfolio is right for you. An independent financial advisor can help you define your retirement needs and invest your RRSP funds in a way that is most likely to meet them.
Fixed income securities
These are investments like bonds or GICs that normally pay you a fixed rate of interest over a fixed term, and promise to return your invested capital (or their face value) at the end of the term. Governments of Canada and provincially guaranteed fixed income securities form the cornerstone of most RRSPs because of the security implicit in the government’s promise to repay the face value of the investment. While an RRSP comprised predominantly of fixed income investments might be right for someone approaching retirement, whose foremost objective is preservation of capital, such an RRSP might not be right for someone younger who is more concerned with growth of capital.
Inflation erodes the value of money. Think about it. If inflation runs at its average annual level of 3.5 per cent, you will need $2,800 in the year 2025 to buy what you can buy for $1,000 today. That works out to almost a 65 per cent decrease in the purchasing power of your money over 30 years. History shows that stocks have been the most effective financial investment for offsetting the effects of inflation. Historically, stocks have provided superior capital appreciation when compared to bonds and treasury bills, over the long term. Careful stock selection and regular monitoring of your stock portfolio can both maintain and actually enhance the purchasing power of your money. That’s why many people include individual stocks in their RRSP portfolios.
Certain mutual funds do offer a unique strategy in RRSP investing that other RRSP investments do not. This strategy focuses on the allowable foreign content legislation and the benefits of global diversification. By investing the maximum allowable portion of your RRSP portfolio in non-Canadian markets, you will enjoy greater diversification, reduced risk and the opportunity for potentially higher returns. The simplest way to achieve optimal global diversification within your RRSP is through the use of certain mutual funds. If you want to increase foreign content beyond the 20 per cent limit, consider purchasing a 100 per cent RRSP eligible foreign content mutual fund or a Canadian mutual fund that internally utilises its 20 per cent foreign content limit. In this way you can effectively achieve 36 per cent international exposure.
John Currie is a financial advisor with Midland Walwyn, West Vancouver office. If you have any questions or concerns or would like to read about other current financial topics in an upcoming issue, please feel free to phone John at 1-800-772-9066.