All the investing mistakes that people make during the year are writ large at RRSP time, when the pressure is on to make a contribution regardless of where the money goes.
Yet the principles of sound investing are every bit as important – having a diversified portfolio, sticking to an investment plan and rebalancing if the circumstances require it.
Here are some mistakes the professionals see people making year after year.
1. Having too many funds
"Some people come to us with over 20 funds in their RRSP," says Tom Bradley, president and co-founder of Steadyhand Investment Funds, based in Vancouver.
Too often, investors chase the latest hot fund instead of looking at their asset mix and long-term objectives, Mr. Bradley says. "You look at the names of the funds and you can almost tell what year they were bought."
Indeed, process often trumps product, says Warren MacKenzie, a principal at HighView Financial Group in Toronto. "People wonder whether they should buy this stock or that one," he says. "They should be looking at their entire asset mix based on their financial plan. That kind of disciplined process is more important than the investment product."
2. Not seeing the big picture
Another mistake, Mr. Bradley says, is to look at your RRSP in isolation instead of seeing is as part of your overall portfolio. For some people, their RRSP may constitute their entire portfolio, but others have non-registered holdings as well.
Generally speaking, income-producing investments – which are taxed highly – should be held within the RRSP, and stocks should be in non-registered plans to take advantage of the dividend tax credit and capital gains exemption. The RRSP forms an integral part of the whole.
Mr. MacKenzie says, "If you don't see the big picture, it would be pure luck if you were in the right asset mix." Investors could treat their current year's contribution as an opportunity to rebalance by buying equities when they are low, Mr. MacKenzie says.
3. Failing to diversify
"The biggest mistake people make is not having a fully diversified portfolio," says Jason Pereira, a financial planner at Woodgate Financial Inc. in Toronto. Investors should have a mix of stocks and bonds whose historical risk level is in line with their risk tolerance, Mr. Pereira says.
"What will that portfolio look like in a down market?" Mr. Pereira asks. "The biggest danger is not losing money [on paper] but losing money and cashing out." The key is being comfortable with the downside.
Achieving diversification is not difficult, he notes. "You can buy a fully diversified portfolio, rebalanced, with one mutual fund," he said, referring to low-cost balanced funds.
4. Being frozen with fear
After so many months of volatility and falling prices, people become paralyzed with fear, says Ngoc Day, a financial planner and portfolio manager at Macdonald Shymko & Co. Ltd. In Vancouver. "They get scared and just sit on the sidelines."
You may spare yourself some short-term gyrations, but it's unlikely you'll catch the market on the way up. "By the time you realize it's rebounding, the train is long gone."
5. Not having a plan
"The biggest one for me is that people don't have a plan," Ms. Day says. They have an idea of where they want to go but no road map. "You end up falling into the hottest and latest" investment products, she says.
Investors with a plan will be able to more clearly see the opportunity in a weak market and rebalance.
"Canadian equities are low so that's where I'm going to put my money," Ms. Day says. "Having a plan forces you to be disciplined. You buy when things are on sale. That's very hard to do," she says.
A few tips
Here are tips from Mr. MacKenzie on managing your money wisely inside or outside of your RRSP:
- Be clear about your financial goals and have a financial plan that shows the rate of return and therefore the best asset mix to achieve your goals.
- Be diversified, address all the risks, and take no more risk than necessary to achieve your goals.
- Don’t try to beat the experts by picking the best individual stocks. Use exchange-traded funds or professional money managers.
- Keep it simple.
- Be efficient from an income tax point of view.
- Know what fees you are paying.
- Insist on a report that shows performance compared to the proper benchmarks.