RRSP Centre

• Self-Directed RRSP
• Deduction Limit
• Spousal RRSP
• Investment Options
• Investment Strategies
• RRSP Loans
• How Much Will I Need to Save?
• RRSP Maturity Options
• Annuities
• RRIFs
• Self-Directed RRIF
• How Much Income Will I Need?
• How Long Will My RRIF Last?
• Naming a Beneficiary
• Retirement Planning for Small Business Owners

RRSP Centre

Investment Strategies for your RRSP

Develop a Strategic Investment Plan
Perhaps the most important aspect of any investment program is the foundation upon which it is built: the long-term strategic plan. When developing an investment plan it is important to consider a variety of factors including your investment time horizon, investment goals, and risk tolerance. In addition, it is also important to establish reasonable return expectations.

Typically stocks outperform bonds over the market cycle. The average return for Canadian stocks of 8% to 10% per year compares to about 6% to 8% per year for a diversified basket of bonds. Over time, it is easy to see the potential impact of stocks on your portfolio when you consider how an initial $10,000 invested in January 1960 has grown over the past 44 years. If you had invested $10,000 in Canadian stocks at the beginning of 1960, it would have grown to $719,418 by the end of 2004, compared to $371,722 for Canadian bonds and $182,409 for treasury bills*.

The "price" of this outperformance is that stock market returns are variable and unpredictable. The equity market's performance in recent years provides a stark reminder of this volatility.

Manage Risk Using an Asset Mix Strategy
It is important to recognize that there are risks inherent in any asset class (stocks, bonds, cash), which cannot be eliminated. But, by spreading your investments across different asset classes, you can reduce your portfolio's exposure to any single asset class and the associated risks. Furthermore, asset classes do not usually move in tandem with one another due to varying investment characteristics that react differently to the same economic variables. As such, exposure to a variety of asset classes can help to smooth portfolio performance and reduce volatility.

BMO Nesbitt Burns makes asset mix recommendations for investors with different goals and abilities to tolerate risk. While the minimum and maximum ranges for the asset classes that comprise your portfolio will be unique to you and your investment objectives, in general, the greater the desire for growth and inflation protection, the greater the exposure to equities.

Invest for the Long Run
Once your portfolio has been established, time passes and your outlook for the markets changes. How do you incorporate your new outlook into your portfolio? Some investors look at the financial markets and opt to move out of entire asset classes that they believe are overvalued and wait in cash until they find what is believed to be an opportune entry point. This strategy, called market timing, is an aggressive method for dealing with changing total return forecasts. As appealing as this method may sound, it can be costly, as very few investors are able to pick the perfect moment to get in or out of the market. While there is a good possibility that the market timer may indeed miss some of the market downturns, it is also possible that the investor will be sitting in cash when the market takes off.

Minor weighting shifts within an asset mix due to a changing economic and market outlook permit investors to take advantage of opportunities as they arise. However, the underlying approach is not the same as market timing; we do not recommend that you desert one asset class in favour of another. Instead, we recommend adopting the long-term asset mix approach to investing.

Maximize Foreign Investing
Canada comprises roughly 3% of the world equity market. In other words, 97% of global equity market opportunities are outside of our borders. As such, it is important to consider the benefits of including foreign investments in a well-diversified portfolio.

Many investors allocate a portion of their equity investments outside Canada because over the long run, international equities have outperformed Canadian equities. For instance, $10,000 invested in the S&P/TSX Composite Index at the beginning of 1980 would have grown to $103,149 by the end of 2004. The same amount invested in the MSCI EAFE (Europe, Australia, Far East) Index and S&P 500 Index would have grown to $156,247 and $246,225, respectively.

From a risk/reward perspective, an investment in global equities can actually lower portfolio risk, while at the same time improve portfolio returns. Current RRSP legislation has removed the previous foreign content limit of 30% of the book value of an investor's RRSP.

It is always difficult to predict how individual securities and the markets will perform in the future. A sound investment plan and a well-diversified portfolio will help ensure you are able to achieve your long-term investment goals and at the same time make periods of market volatility more tolerable.

For more information, contact an Investment Advisor at a BMO Nesbitt Burns branch near you.

If you would like a BMO Nesbitt Burns Investment Advisor to contact you, simply complete this brief contact form.

*Investment returns are not guaranteed. Their value changes frequently and past performance may not be repeated.
The comments included in this article are not intended to be a definitive analysis of tax law: The comments contained herein are general in nature and professional advice regarding an individual's particular tax position should be obtained.