One of the greatest mistakes people make with their RRSPs is to make a contribution and then forget about it. Think of the money you put into your plan as a seed. It’s not going to grow unless you provide the tender loving care needed to make that happen.
That means choosing appropriate investments and then reviewing the plan at least once every six months to ensure it’s on track. If the investment climate changes, it may mean you have to pivot on some of your investments to keep pace.
The investment climate has in fact changed dramatically in the past six months. We’ve moved into a period of rapidly increasing inflation, with the probability of rising interest rates for the rest of 2022 and perhaps beyond.
That means we must make some changes in our model RRSP portfolio to adapt to the new situation.
Our RRSP Portfolio, which marks its tenth anniversary this month, stood its ground in the latest six-month period, despite tumbling bond prices and weakness in the tech sector. But standing pat isn’t our goal. We are aiming to build a large pool of capital to draw on in retirement. For some people, an RRSP will be the only pension plan they ever have.
This portfolio was launched in February 2012. It has two main objectives: to preserve capital and to earn a higher rate of return than you could get from a GIC. The original value was $25,031.92.
Almost 30 per cent of the portfolio is in bonds and cash. The balance is in growth-oriented assets that offer exposure to the Canadian, U.S., and international equity markets. The portfolio contains a mix of ETFs, stocks, and limited partnerships so readers who wish to replicate it must have a self-directed RRSP with a brokerage firm.
These are the securities currently in the portfolio with comments on how they have performed since the last review in August. Results are as of the afternoon of Feb. 10.
PIMCO Monthly Income ETF (PMIF-T). This global bond fund continues to slide, dropping 64 cents in the latest period. We received distributions of just over 39 cents per unit.
iShares Canadian Universe Bond Index ETF (XBB-T). This ETF tracks the performance of the total Canadian bond universe including government and corporate issues. Bonds are not doing well and with interest rates poised to rise the short-term outlook is poor. The units declined $1.76 since the last review. We received distributions of 39.5 cents per unit.
iShares Canadian Corporate Bond Index ETF (XCB-T). This fund invests exclusively in corporate issues. It was added to the portfolio in February 2019. In the latest period, it lost $1.17 per unit. We received monthly distributions totaling 33.1 cents.
iShares Convertible Bond Index ETF (CVD-T). This fund invests in bonds that can be converted into common stocks under certain conditions. It offers a play on the stock market while providing cash flow. The units lost 70 cents in the latest period, but we received distributions of just over $0.41 per unit.
iShares Core U.S. Aggregate Bond ETF (AGG-A). This ETF aims to replicate the returns of the total U.S. bond market. It was added in 2019 to give us more exposure to American bonds. The units took a big hit in the latest period and are down $6.03. We received distributions of 96.7 cents.
Harvest Tech Achievers Growth and Income ETF (HTA-T). The fund invests in an equally weighted portfolio of 20 large cap tech companies such as Apple Inc., Cisco Systems Inc., and Adobe Inc.. The managers write covered call options to generate income. The units lost three cents over the latest six months, but that was a good showing as tech stocks have been selling off. We received 42 cents per unit in distributions.
iShares Edge MSCI Minimum Volatility USA Index ETF (CAD-Hedged) (XMS-T). XMS invests in low-beta US stocks such as Coca-Cola Co., Visa Inc., McDonald’s Corp., and Verizon Communications Inc. Low beta means they are less sensitive to broad market movements and, in theory, less risky. The fund posted a small loss of 29 cents in the latest six months. Quarterly distributions totaled 16.7 cents per unit.
BMO Low Volatility Canadian Equity ETF (ZLB-T). This ETF invests in a portfolio of large-cap Canadian stocks that have a low beta history. It’s up a modest 49 cents since the last review, and we received two quarterly distributions for a total of 49 cents.
BMO Low Volatility International Equity Hedged to Canadian Dollar ETF (ZLD-T). This ETF focuses on international stocks and is hedged to Canadian dollars, so the currency risk is removed. It lost $1.72 in the latest period. Distributions totaled 30 cents per unit.
Brookfield Renewable Energy Partners LP (BEP.UN-T). This Bermuda-based limited partnership owns a range of renewable power installations (mainly hydroelectric but also some wind and solar). Green energy stocks have been in the stock market doghouse for the past year, as oil stocks surged. The units dropped $4.99 in the latest period. We still have a good long-term profit on this, and green energy will eventually recover.
Brookfield Infrastructure Partners LP (BIP.UN-T). This limited partnership invests in infrastructure projects around the world. The units have fared much better than BEP.UN, gaining $7.72 in the latest six months. We received two distributions of 51 US cents each.
Fortis Inc. (FTS-T). We added this utility stock to the portfolio in August, as we sold our positions in the Brookfield corporate spin-offs. We gained a total of 4.2 per cent, including dividends, in the last six months.
BCE Inc. (BCE-T). BCE continues to show strength and the stock gained $2.76 in the latest period. We received two quarterly dividends of 87.5 cents.
Interest. We invested $2,706.39 in the EQ Bank Retirement Savings Plan, paying 1.25 per cent. We received $16.91 in interest.
Here is how the RRSP Portfolio stood as of Feb. 10. Commissions have not been factored in and Canadian and US currencies are treated at par for ease of tracking.
Comments: The bond sector hurt our results, as all our fixed-income funds lost ground. Brookfield Renewable Energy Partners also continued to slide. We had decent gains from BCE, BIP, and Fortis, which was added to the portfolio last August.
The net result was a small gain of 0.89 per cent for the six-month period. Over the ten years since the portfolio was launched, we have a total return of 159.4 per cent. That’s an average annual growth rate of 10 per cent, well above target.
Changes: RRSPs should contain a reasonable percentage in bonds, which offer long-term stability and provide a cushion if the stock market crashes. But many people are frustrated by the fact that bond prices have been falling in the face of higher interest rates and are likely to continue to do so.
I am going to try partially to address this problem by making some moves that will allow us to retain our fixed income exposure while reducing the loss potential. I’m also going to make a fundamental equity change.
For starters, we’ll sell our positions in PMIF, XCB, and AGG. Although it’s not related to the fixed income sector of the portfolio, we’ll also sell HTA, as tech stocks have lost momentum for now. That will give us $16,462.72 to reinvest.
We will add 130 units of the iShares 0-5 Years TIPS Bond Index ETF (XSTP-T) at a cost of $40 per unit. Total expense is $5,200. This is a new ETF that invests in short-term U.S. Government inflation protected notes. They pay a low rate of return, but both the face value and the interest increase as inflation rises. This is a defensive position. I do not expect much in the way of total return, but the fund offers downside portfolio protection.
We will also buy 280 units of the iShares S&P/TSX Canadian Preferred Share Index ETF (CPD-T). This is a more aggressive move, but most Canadian preferreds are now rate reset issues, which tend to rise as interest rates move higher. That means there could be some capital gains potential here, on top of the attractive 4.2 per cent yield. The units are trading at $13.86. We will buy 280 of them, for a cost of $3,880.80.
Our biggest move will be to add a bank ETF to the portfolio. Bank stocks tend to do well in periods of inflation and rising interest rates so we will buy 170 units of the BMO S&P/TSX Banks Equal Weight Index ETF (ZEB-T). They are trading at $42.46, so our cost is $7,218.20.
That leaves $163.72, which will be added to our cash balance.
The only other move we will make is to add 10 units of BEP.UN while the price is down. The cost is $434.50, leaving retained earnings of $102.46.
The new cash balance (including retained income) is $2,744.33. We will keep it in the EQ Bank Retirement Savings Plan, which is still paying 1.25 per cent.
Here is the revised portfolio. I’ll review it again in August.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
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