The RRSP season ain't what it used to be. In the 1980s and '90s when investing was fun, it was a focal point on the investment calendar. You couldn't open the newspaper or walk a block without seeing an advertisement. Banks stayed open late to accommodate last-minute contributions and all firms brought in extra staff to deal with the February rush.
Investing hasn't been as much fun in recent years and the RRSP season is now more of a necessary evil. But January and February are still when most investors spend time thinking about their portfolio and making decisions on where to put their money. So whether it's fun or unpleasant, here are a few things to consider when going through the RRSP ritual.
Wrong question
The most commonly asked question during RRSP season is, what should I buy? Certainly, the question needs to be asked, but it should be down the list. The first is, what do I need? In the context of your long-term plan, where is your overall portfolio underinvested? A new investment has to make sense in the context of what you already own (RRSPs and other financial assets).
Last year, there was a wide dispersion of returns. Bonds were strong, U.S. stocks were up, but Canadian and international stocks were down significantly. Small cap and emerging markets were particularly hard hit.
Coming out of 2011, your portfolio may now be over-invested in asset classes that have done well (bonds for instance) and under long-term targets in others. Registered retirement savings plan and tax-free savings account (TFSA) contributions are an effective way to redress any imbalances.
Look inside first
After narrowing down what you're looking for, you need to be proactive in your search. I say that because RRSP season is a time when investment companies barrage you with hot, new products. The latest and greatest are on full display. Unfortunately, too many portfolios are littered with prior years' RRSP solutions – technology (1998 or 1999), agriculture (2008), gold (2010) and silver (2011) – and don't have a clear direction.
So while the spotlight is on the new and exciting, your first stop is to look for the old and boring in your existing portfolio. You've previously made choices as to how you want your money managed and know what you're getting (people, philosophy, long-term performance). Unless a change is required, allocating more capital to existing strategies and funds makes a lot of sense. If a manager or fund has performed poorly in recent periods, all the better. You can lower your average cost.
Gap attack
I write often about the behavioural challenges that investors face. These obstacles are best illustrated by the Behaviour Gap – a rather depressing statistic that shows the degree to which investors' returns lag behind returns of the funds they invest in. The gap, which is significant, exists for many reasons, but the primary ones are too much trading and a propensity to chase last year's winners. In Canada, the RRSP noise (subdued as it is) and end-of-February deadline don't help matters.
But there are some things you can do to narrow the gap. The first is to contribute every year, no matter how good or bad it feels. Don't blink because of what's going on in the markets. If you look back, you'll undoubtedly find that the "feel bad" contributions were actually the best timed. The benefits of saving are certain, while market timing is anything but. Just do it.
Second, make decisions in the context of an overall portfolio strategy. You shouldn't be buying what's hot – unless it's what the portfolio needs.
And third, take advantage of the longer time horizon and locked-in nature of your RRSP. You don't need to worry about selling when markets are down. Indeed, when the gloom gets heavy, you can use it to build your portfolio at more attractive prices. So in today's environment where most investors are pursuing the impossible dream – growth with no downside – you can embrace the uncertainty and volatility. It will give you exactly what you need – capital growth with bumps along the way.
Tom Bradley