Illustration: Jori Bolton
(Illustration: Jori Bolton)
The registered retirement savings plan will turn a mature (yet still vital) 57 this March. Some things have changed-the annual contribution limit has grown, the age when you must withdraw has risen and foreign-investment rules have relaxed-yet the idea behind Canada's most popular savings vehicle is still sound. "You do the same thing every year," says Stephen Reichenfeld, a vice-president and private wealth counsellor with Fiduciary Trust Canada. "Invest regularly and grow your savings."
Nonetheless, the tactics around how best to grow your money have evolved. At one time, few people thought about borrowing to invest or deviating from the traditional 60% equities, 40% fixed income asset mix. With bond yields near record lows and the Canadian dollar on a slide, however, it's time to take a fresh approach to your RRSP strategy.
Use short-term leverage
For most of the past three decades, borrowing money to invest in an RRSP made little sense. Interest rates were simply too high. But more and more advisers now promote the practice. Why? Because rates are so low that carrying a loan for a few months shouldn't hurt your finances. "I have no problem with it at all," says Bob Gorman, TD Waterhouse's chief investment strategist.
Use this strategy for the sole purpose of reducing your tax burden. The more money you invest in an RRSP account before the March 3 cutoff, the more you can recoup from the Canada Revenue Agency in April. Your tax refund then goes toward paying off the loan. Stretch that repayment process any longer than a year, though, and you will likely lose the benefit of that borrowing. Gorman points out that interest on an RRSP loan is not tax deductible, so there's no benefit in waiting to pay it off.
Invest in a lump sum
Your financial institution will encourage you to invest a little bit of cash every month, or even biweekly, but new research shows that if you have the cash already, lump-sum investing will improve your return most of the time. This is especially true if you are paying transaction fees (say, to buy stock) each time you contribute. However, investment professionals rightly caution against making a big payment at the last minute; it's never wise to invest under pressure.
Susan Latremouille, a director and wealth adviser at Richardson GMP, has found a way to make a big deposit and do it well before the contribution clock ticks down. Her clients put as much money as they can into their account on Jan. 2. The deposit covers the upcoming year. Clients then don't have to worry about contributing for 12 months and they can start growing their contribution immediately. "Get all the money working for you from Day 1," she says.
If you don't have the cash in hand for this strategy, then investing monthly beats waiting until the deadline. The sooner you can get your dollars into the account, the better it is for your future, she says.
Unhedge your dollars
With the Canadian dollar declining against its U.S. counterpart, investors may be wondering whether or not they should hedge their foreign investments. With many financial institutions predicting the loonie will fall further in 2014-Goldman Sachs thinks it could drop to 88¢ (U.S.)-unhedged portfolios stand to get a boost.
Reichenfeld took the hedge off his clients' portfolios in early 2013. He didn't think the loonie's parity with the greenback was sustainable, and he was right. While he notes it's impossible to know exactly where exchange rates are headed, he's going to remain unhedged for the time being.
Being exposed to currency ups and downs does increase volatility, warns Gorman, so income-oriented investors or those who can't stomach any additional risk should hedge. Otherwise, now is a good time to be exposed to some currency diversification. "We don't hedge in this environment unless people have a clear need for doing so," he says.
Rethink asset allocation
High-paying fixed income was, at one time, the best thing to hold in an RRSP portfolio. Reinvesting those distributions instantly gave your assets a lift when little else would. However, now that interest rates are stuck near record lows, bonds don't serve the same purpose they once did. Still, many people haven't changed their asset mix, says Gorman. "A lot of people still have heavy weights in fixed income, yet what's worked for many years won't work nearly as well going forward," he explains.
Over the next few months, people should allocate more of their money to equities and less to fixed income, he says. If you still want income and stability-which is what bonds typically provide-then buy companies that pay and regularly grow a dividend. "They're very resilient and have lower volatility," he says.
One strategy that's stood the test of time is to review your portfolio at least once a year and think about ways to maximize returns. Still more important: "Keep saving," says Reichenfeld, "whatever that means to you."
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