Over the years Paul Gardner has helped countless clients invest for retirement. As markets have become more jittery and investment news has become a 24/7 business, the partner and portfolio manager with Avenue Investment Management has noticed a change in the way people treat their RRSPs. “Many people—especially do-it-yourself investors—think their RRSP is a trading account as opposed to a pension plan,” he says. “But really, they need to replicate large pensions.”
As everyone knows, an RRSP account is where retirement savings goes. But less people know how to structure the account to make sure there’s something left at retirement. It comes down to one thing, says Gardner; holding long-term assets. Whether it’s a fund, ETF or stock, the investment needs to last for years, if not decades.
That means owning large-cap investments. Typically, larger companies with a market capitalization of at least $10 billion are safer than smaller ones. A mutual fund that holds Canadian bank stocks won’t rise in value as quickly as one that holds junior mining firms, but it won’t fall nearly as quickly either. Not only do large caps decrease volatility, but these companies, especially multinationals, aren’t nearly as likely to go bankrupt. A fund that holds decades old brands such McDonalds and Coca-Cola, for instance, will likely be around for the long-term.
AJ Sull, president and chief investment officer with Vancouver’s Pacifica Partners Capital Management, says dividend-paying companies should also be an integral part of an RRSP portfolio. There’re good for two reasons, he says. The first is that people don’t have to worry too much about whether their investments are increasing in value; regular dividend payments will keep money flowing into account. “You’re getting paid something while you wait for the stock price to rise,” adds Gardner.
The second is that dividend payments allow Canadians to buy more fund units or ETFs without adding to the principal. Ultimately, the more assets you own the more you’ll have when it’s time to retire. Imagine how much larger your portfolio will be after reinvesting dividends for 30 years.
Not only do Canadians have to buy long lasting investments, but a good RRSP also has the right asset allocation. Steven Belchetz, president and chief investment officer with Toronto’s T.E. Wealth, says that retirement portfolios need to be diversified globally. Canada’s market is concentrated in just three sectors, financials, materials and energy, so having too much domestic exposure could be risky.
For the equity part of an RRSP, Belchetz recommends having 50% of assets in Canadian securities, 25% in the U.S. and 25% in international markets. You still want to be more heavily weighted towards domestic securities because of the currency risks around non-Canadian investments.
When it comes to bonds or bond funds, what to buy depends on risk tolerance. Government bonds yield around 2%, but they’re extremely safe. Corporates have a better yield, but they’re riskier. Either way, the basic rules around age and asset allocation remain; own less bonds when you’re younger and more when you’re older. Sull says investors should have, at minimum, 20% of their RRSP assets in fixed income.
By sticking to large-cap, dividend-paying securities your retirement should be secure. Save your risky buying and selling for another account, says Gardner. “No matter if it’s an ETF or mutual fund, RRSPs should hold the core long life assets,” he says. “It’s not for the newest and craziest trading strategy.”