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I’ve often heard people refer to “buying” an RRSP, as if it were a carton of milk or a bunch of bananas.

It’s not. If anything, it’s like buying a bowl or a box – containers meant to hold something.

In this case, the RRSP container is meant to hold the securities you purchase. These are the assets that will ultimately determine how much money you’ll have available to help fund your retirement.

So, what should they be? As you make your decisions, remember the basic goal of RRSP investing: moderate growth at minimal risk. If possible, you want to avoid losing money in your plan. If you do suffer a setback, make sure it’s a small one.

For this reason, I suggest dividing your RRSP investment strategy into tranches, to be implemented at various stages as you age. Here’s what I recommend.

Starting out

You’re just beginning, you don’t have a lot of money to put aside and your investment knowledge is minimal. At this stage, I suggest a balanced portfolio of ETFs and/or mutual funds. This will provide diversification while keeping risk to a minimum.

Invest about 35 per cent of the assets in bond funds. The largest position should be in a Canadian universe bond ETF, such as the iShares Core Canadian Universe Bond Index ETF. You should also own a U.S. bond fund, such as the iShares Core US Aggregate Bond ETF.

Your largest investment (about 60 per cent) should be in the stock market, and this is where you’ll experience the greatest risk. To reduce the downside potential, start with low-volatility funds. These invest in low-beta stocks, which means their price is more stable than the overall market. The BMO Low Volatility Canadian Equity ETF should be at the top of your list. It hardly ever loses money and on the rare occasions it does, the decline is small. There are also U.S. and international low-volatility funds available, which will provide geographic diversification.

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For greater profit potential, with somewhat more risk, invest some money in index ETFs. All major mutual fund and ETF companies offer products that cover the Toronto Stock Exchange and the S&P 500 Index. You should also include an international ETF, such as the iShares Core MSCI EAFE IMI Index ETF.

Keep 5 per cent in cash-type securities to hold in reserve in the event a good opportunity presents itself. Suggestions include short-term GICs, money market funds and high-interest ETFs such as the CI High Interest Savings ETF or the Horizons High Interest Savings ETF.

I would not recommend investing in individual stocks at this stage. Most people don’t have enough money in their RRSPs in the early years to properly diversify – by sector and geographically. ETFs give you that diversification.

The growth years

As you become more comfortable with your investment decisions, you should add more growth potential to your plan. You can do this by reducing your fixed income allocation to, say, 20 to 25 per cent and by expanding your portfolio to include sector ETFs and individual stocks.

You’re still looking for that magical combination of above-average return with reasonable risk. But now you’re applying those parameters to a wider range of securities.

Sector ETFs invest in specific market segments, like technology or health care. These can offer outsized returns but come with greater risk. An example is the iShares S&P/TSX Capped Information Technology Index ETF. It invests in a portfolio of Canadian information technology companies, such as Shopify Inc. The ETF’s track record shows a great deal of volatility; it gained 17.5 per cent in 2021, lost 35.9 per cent in 2022 and was ahead 55.5 per cent in 2023. Many RRSP investors would be uncomfortable with those price fluctuations.

But there are many sector ETFs that are less turbulent, especially if you buy at the bottom of a cycle. That means looking at market sectors that have been out of favour, but which are likely to benefit from changing conditions. Right now, that would include an expected decline in interest rates later this year.

The BMO S&P/TSX Equal Weight Banks Index ETF fits the bill. This is a pure play on Canada’s six largest banks, with roughly equal positions in each. Results will vary from year to year, but less dramatically than those of the iShares info tech ETF. The BMO banks index ETF gained 39.4 per cent in 2021, lost 10.4 per cent in 2022, and bounced back with a gain of 10.9 per cent in 2023. The 10-year average annual compound rate of return to Dec. 31 was 9.3 per cent.

Other ETFs that should outperform as interest rates decline include the CI Canadian REIT ETF, the BMO Global Infrastructure ETF and the BMO Equal Weight Utilities Index ETF.

I would hold on to the broad index funds at this stage, but I’d add some individual stocks to the RRSP. In doing so, look for these key characteristics: industry leadership, respected management, steady growth, strong balance sheet and regular dividend increases.

Canadian companies that I suggest would suit any RRSP are Royal Bank of Canada, Canadian National Railway Co., BCE Inc., Fortis Inc. and Brookfield Corp.

Top-rated U.S. companies should also be considered. My list would include Visa Inc., Microsoft Corp., FedEx Corp., Johnson & Johnson, Walmart Inc. and UnitedHealth Group Inc.

I do not recommend small-cap stocks in an RRSP. They can generate huge gains – Boyd Group Services Inc. is the best performer in the history of my Internet Wealth Builder newsletter, with a gain of 5,355 per cent. But small caps can also go to zero if you make poor choices. If you want to speculate, do it outside your retirement plan.

The wind-down

As you approach your expected retirement age, it’s time to switch gears. The last thing you need is for your RRSP to take a huge hit just before you plan to start drawing on it. That’s exactly what happened from 2007 to 2009 during the financial crisis, and many people were traumatized by the sudden collapse in the value of their portfolios.

You can avoid this by de-risking the plan. The starting point is asset mix – gradually rebuild your fixed income and cash allocations, selling off some of your higher risk equity positions to achieve this. This would include your sector funds and any stocks that appear to be losing momentum.

This is not to suggest that you abandon the stock market. You’ll want to retain some growth potential in your plan as you make the transition to a Registered Retirement Income Fund. But RRIFs should be more defensive than RRSPs. Don’t wait until you are retired to begin the process; you may miss opportunities.

At this stage, your RRSP should have 40 to 45 per cent in cash and fixed income. Your equity positions should focus on low-volatility and broad market ETFs, along with some selected stocks that offer attractive yields.

Looking for direction with your RRSP? Here are my five steps to success

Finally, never forget that your RRSP is really a pension plan. Manage it accordingly. That means maintaining an appropriate asset allocation, diversifying geographically, avoiding undue speculation and monitoring the portfolio on a regular basis (at least quarterly). If you do, you’ll end up with a very healthy pension fund, which will provide steady income for the rest of your life.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 01/03/24 3:46pm EST.

SymbolName% changeLast
XBB-T
Ishares Core CDN Universe Bond ETF
+0.47%27.68
AGG-A
US Aggregate Bond Ishares Core ETF
+0.48%97.53
XEF-T
Ishares Core MSCI EAFE IMI Index ETF
+0.99%36.59
CSAV-T
CI High Interest Savings ETF
+0.04%50.07
CASH-T
Horizons High Interest Savings ETF
+0.06%50.02
XIT-T
Ishares S&P TSX Capped Info Tech ETF
+1.54%55.44
ZEB-T
BMO S&P TSX Equal Weight Banks Index ETF
+0.66%35.29
RIT-T
CI Canadian REIT ETF
+1.07%16.11
ZGI-T
BMO Global Infrastructure Index ETF
+0.1%41.72
ZUT-T
BMO Equal Weight Utilities Index ETF
+0.58%19.21
RY-T
Royal Bank of Canada
+0.11%131.94
CNR-T
Canadian National Railway Co.
+0.41%176.69
BCE-T
BCE Inc
-0.42%50.15
FTS-T
Fortis Inc
-0.1%52.28
BN-T
Brookfield Corporation
+0.5%56.28
V-N
Visa Inc
+0.18%283.16
MSFT-Q
Microsoft Corp
+0.45%415.5
FDX-N
Fedex Corp
-0.95%246.6
JNJ-N
Johnson & Johnson
+0.46%162.12
WMT-N
Walmart Inc
+0.26%58.76
UNH-N
Unitedhealth Group Inc
-0.82%489.53
BYD-T
Boyd Group Services Inc
-2.11%311.79

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