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Three reasons why the 2021 version of RRSP season could be the most confusing ever:

  • The S&P/TSX Composite Index, as of late this week, was up 64 per cent since late March, 2020 – yes, there was a global pandemic on during that period.
  • According to a TD Economics report issued this week, there was $200-billion or more in excess savings built up in 2020 by people unable or unwilling to spend as normal during the lockdowns to fight COVID-19. So much money earning nearly nothing in bank accounts.
  • Polls tracking intentions to contribute to registered retirement savings plans are all over the place, which suggests people don’t know their own minds.

It’s weird out there, but many people need to contribute to RRSPs to reach their retirement savings goals. Let’s look at four ways to make an RRSP contribution before the March 1 deadline, with an eye on managing the risk of putting a block of money into the stock market after a big move higher.

The bullet-proof approach

What to do: Open an EQ Bank RRSP Savings Account.

Making the case: EQ, an online bank, is paying 2.3 per cent for now on this account with no fees or minimum balance. Grade this option A-plus for safety.

Watch out for: You know how these offers of unusually high interest on savings work, right? The rate stays high until the bank offering it decides to pull the plug. This can happen at any time, so there shouldn’t be any indignation if you open this account and the rate falls later on. You were warned.

Background: EQ Bank is covered by Canada Deposit Insurance Corp., which means eligible deposits are protected to a maximum $100,000 in principal and interest.

Strategy: Park your RRSP contribution for the 2020 tax year here, collect the 2.3-per-cent interest for as long as it lasts and then move your money when you’re ready. EQ’s rate on a regular savings account was 1.5 per cent as of this week, which is at the high end of what’s available from alternative bank savings accounts.

The balanced approach

What to do: Buy a balanced exchange-traded fund through an online broker.

Making the case: Balanced ETFs blend stocks and bonds into a diversified portfolio you purchase in a single package that trades like a stock. The mix of stocks and bonds ranges from 40 per cent stocks and 60 per cent bonds to 50-50, 60-40, 70-30 and 80-20. Bonds have offputtingly low yields right now. But the more bonds you have, the better you’re cushioned against the full extent of a stock-market downturn.

Watch out for: You’ll need an account at an online brokerage to buy a balanced ETF, or a trading app like Wealthsimple Trade or TD GoalAssist. Brokers generally charge up to $10 to buy and sell ETFs, but a few waive some or all commissions. More info on that here.

Background: A survey of balanced ETFs can be found in The Globe and Mail ETF Buyer’s Guide – they differ a bit on fees and portfolio construction.

Strategy: This is pure market-timing, which rarely produces the best possible investing outcome, but what about addressing your market concerns by buying a conservative balanced ETF for RRSP season and switching to a more aggressive fund after a market pullback?

The ‘wake me up in 12 months’ approach

What to do: Park your RRSP contribution in a one-year guaranteed investment certificate.

Making the case: If you’re experiencing sensory overload as a result of the pandemic and all the odd happenings in the financial world, a one-year GIC makes the problem of what to do with your RRSP money go away for 12 months.

Watch out for: Very low interest rates. The GIC rate comparison chart on the Canadian High Interest Savings Bank Accounts website listed top rates of 1.4 to 1.5 per cent as of late this week.

Background: It’s unlikely that a rate of 1.5 per cent will keep up with the inflation rate expected over the next 12 months. Of course, 1.5 per cent will look fine if stocks hit a rough stretch.

Strategy: Consult an alternative online bank or credit union for your GIC. One of the big banks had a “special offer” 14-month GIC for RRSPs at 0.55 per cent. Lower rates, longer lock-in for your money. Pass.

The stock market lite approach

What to do: Buy a low volatility ETF

Making the case: This type of ETF focuses on stocks that move up and down in price to a lesser extent than the broader market. Holdings typically include heavy weightings in utility, consumer staples (groceries) and telecom companies that do a steady business. Consider what happened in 2018 and 2015, a pair of years where the S&P/TSX Composite Index fell. The BMO Low Volatility Canadian Equity ETF (ZLB) lost 2.8 per cent in 2018 and made 2.7 per cent in 2015; the BMO S&P/TSX Capped Composite Index ETF (ZCN) lost 8.9 per cent in 2018 and fell 8.3 per cent in 2015.

Watch out for: Low volatility ETFs tracking the Canadian stock market performed extremely well for years, but lagged the broader market in 2020.

Background: Low volatility ETFs hold stocks, and stocks can fall hard and fast. The point here is to aim for losing less than the broader market.

Strategy: There are low volatility funds for Canadian, U.S. and international stocks. You could hold them for the long term if you were willing to give up some market upside for the potential to lose less in market declines.

Finally, three investments that last-minute RRSP investors should avoid:

  • Mutual fund portfolios sold by big banks: They’re like balanced ETFs, but in mutual fund form. Convenient to buy, but high fees weigh these things down.
  • Market-linked GICs: The pitch is exposure to stocks without risk of losing money, but the fine print limits how much upside you’ll get if stocks do well. Try a regular GIC from an alternative bank instead.
  • Alternative strategy funds: These funds, increasingly available in ETF form, aim to provide returns that don’t follow the same ups and downs as the stock and bond markets. Avoid any such fund that hasn’t been around long enough to document its performance advantage through an actual stock-market plunge.

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