You’ve been here before. The deadline for RRSP contributions is bearing down and you don’t know where to invest your money.
Isn’t there something, anything, you can buy for your registered retirement savings plan and forget about, you wonder? Something that will let you sleep at night?
It depends on how well you sleep. Although some market watchers argue that the traditional “buy and hold” strategy doesn’t work any more, investment products abound that need little more than an annual checkup. Forgetting about them entirely is not advisable.
“All investors should take a look at their investments at least annually to see if they still meet their objectives and to rebalance” among asset classes, says Robert Gorman, chief portfolio strategist at TD Waterhouse Group Inc. in Toronto.
Here are some long-term investments for people with different means and risk tolerance.
If you can’t stand the thought of losing money even on paper, then guaranteed investment certificates are for you. The bank you buy them from guarantees to repay you in full on a certain date – and to pay you interest, albeit low, in the meantime. But you don’t want to lock in too long or you could lose out on future increases in interest rates.
Financial advisers recommend a one- to three-year GIC ladder. You invest one-third in a three-year GIC, one-third in a two-year one and one-third in a one-year one. When the one-year GIC matures a year from now, you roll it into a three-year note, and so on, turning over a third of the money each year. That way, you capture future rises in interest rates.
The risks: A potential loss of purchasing power over the long term if your GIC returns lag inflation, but many investment advisers say this risk is overblown.
If you have a big portfolio and can afford to invest a substantial sum in one product – say, $150,000 or more – you might consider mortgage pools that are available only to what are known as accredited investors. These pools tend to invest in short-term commercial first mortgages.
A big advantage of mortgage pools – considered alternative investments – is that they tend not to move up and down with financial markets, and so help diversify a portfolio, says Matthew Ardrey, a consultant and manager, financial planning, at T.E. Wealth in Toronto. Mortgage pools distribute income monthly.
Among the mortgage investments Mr. Ardrey has recommended to clients at one time or another are Toronto-based Romspen Mortgage Investment Fund, Timbercreek Asset Management’s offering for accredited investors and Morrison Laurier Mortgage Corp.
Mortgage pools are designed to supplement the fixed-income portion of a portfolio, Mr. Ardrey says. For example, if fixed income makes up 40 per cent of your portfolio, 10 per cent of that could be in mortgage funds.
The risks: The real estate cycle could turn down and some borrowers could default. As well, it could take a while to get your money out of a mortgage pool because they do not trade on the stock exchange.
Mutual funds and ETFs
On the stock fund side, investors can choose from two schools – one that believes actively managed funds will outperform over time, and the other that favours passive and very low-cost baskets, such as index or exchange traded funds.
Younger folks, or people who want their savings to grow over time, could look at low-cost mutual funds, such as those offered by Mawer Investment Management Ltd. of Calgary. Mawer won eight awards, including the best equity funds group, at the most recent Lipper Fund Awards, which honours top-performing funds.
People with relatively small sums to invest can get a complete, balanced and managed portfolio in the Mawer Balanced Fund, a fund of funds whose holdings comprise a handful of other Mawer funds and whose management expense ratio is 0.98 per cent. The fund boasts a one-year return to Dec. 31 of 11.4 per cent, compared to 8.2 per cent for its benchmark.
Growth-hungry investors might consider the Mawer Global Equity Fund, which has a global reach, an MER of 1.45 per cent and a one-year return to Dec. 31 of 16.8 per cent, compared to 14.0 per cent for its benchmark. The fund has 5 to 10 per cent of its holdings in Canada at any given time, reflecting the country’s small share of global market capitalization.
Those who favour passive investments might look at two iShares ETFs recommended by portfolio manager and newsletter editor Patrick McKeough – iShares S&P/TSX 60 Index Fund and iShares Dow Jones Canada Select Dividend Index Fund. Mr. McKeough is editor of the Successful Investor newsletter and TSI Network online.
The iShares S&P/TSX 60 fund holds a basket of the 60 largest companies in Canada. Its expenses are just 0.17 per cent of assets. The iShares Dow Jones dividend fund has an MER of 0.50 per cent, a yield of about 4 per cent and just over half of its holdings in financials.
The risks: All marketable securities go up and down in value, sometimes much more than people expect. So you have to be willing to hang in for the long term.
Dividend paying stocks
For years, analysts and investment advisers have trumpeted the benefits of dividend-paying blue chip stocks of companies with a long track record of steadily raising their dividends. That last point is important.
Eric Davis, vice-president and investment adviser at TD Waterhouse Group Inc. in Kamloops, B.C., offers the following example. The numbers are approximate but show how important it is to choose companies with rising dividends.
Suppose you buy shares of the Royal Bank of Canada at about $62 a share. The $2.40 annual dividend yields about 4 per cent. Now, say that dividend grows by 10 per cent a year, not unusual for a Canadian bank stock. By 2020, it will have risen to about $5 a share, at which point your yield (on your initial cost) will be 8 per cent. If the stock price climbs as well, as it is likely to do over time, that gain will add to your total return.