Five timeless RRSP Tips
Peter J. Merrick , Special to CTV.ca
Published Friday, February 11, 2011 8:15AM EST
Peter J. Merrick is a Certified Financial Planner and the author of ‘The Essential Individual Pension Plan Handbook.' He will be appearing throughout the day on Sunday, Feb. 13, on CTV News Channel to answer your RRSP questions. You may submit your questions in the comments section below at CTV.ca.
In 1957, then-Canadian finance minister Walter Harris introduced the RRSP into legislation as the solution to issues raised by the Canadian Medical Association, which pleaded for a tax deferral plan for self-employed taxpayers that wanted to save for their retirement. Canadians know the rest of this story. Today close to $1 trillion is held in Canadians' RRSPs for the purpose of a healthy financial retirement.
Every February, millions of Canadians rush off to make their last contributions into their RRSPs, to save for eventual retirement and to create tax deductions for their previous tax year. If you find yourself contemplating a RRSP contribution this month, your first step to making a good RRSP decision is to figure out if making the contribution is the right course of action in the first place. Once you've decided that making a contribution makes sense, then you have to figure out where to invest the money.
What stage are you at?
How you invest your RRSPs will depend on what stage of investing you are at. When you are first starting out, you will probably keep things pretty simple. You might buy one or two investments at the same financial institution. The more money you have in your RRSPs, the more sophisticated you can get. Eventually, you should strive towards a Self-Directed RRSP.
Getting help or doing it yourself
The debate between advice or do-it-yourself has been around for a long time. There may have been a time when there was a significant advantage having a good financial adviser to help you invest. Although many people can still benefit from using advisers, the do-it-yourselfer today has all the tools and information to do it on their own. It's really your preference, comfort and confidence that will determine your course.
It is often said, the do-it-yourselfer needs to have the time, knowledge and desire to manage their own portfolio. If you do not have these qualities then you may look to a professional to get help.
Getting help is not always easy because there is also a myriad of choices out there when it comes to choosing an adviser. The other problem is the financial industry is scalable and relies on commission as compensation. In other words, many financial advisers need a certain level of assets to make it worth their time. Those investors just starting out may have to start by heading to the bank.
Whether you use an adviser or not, here are five timeless tips when it comes to investing.
1. Develop a framework
There's a lot of noise, confusion and way too much choice out there. The secret to investment success is to develop a framework or a plan. When I give investment advice, I always preach the merits of having a plan. Without it, you are living by the wing-it strategy.
When it comes to an investment plan, Warren Buffet said it best, "To invest successfully over a lifetime does not require stratospheric I.Q., unusual business insight or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."
It's all about structure, framework and planning.
2. Keep it simple.
There is no shortage of information out there. In fact it's become overwhelming and confusing. We have too much choice and it's paralyzing us from making decisions. There's something to be said about keeping it simple. If you think about it, the strategies that seem to stand the test of time are the ones that are simple. It's also so much easier to manage a simple portfolio. Maybe this is why the couch potato strategy continues to increase in popularity.
3. Don't chase performance
One of the first major research projects that a very successful colleague of mine started back in 1998 was on chasing performance with mutual funds and how often it works. According to his research, chasing performance works about 15% of the time. In other words, choosing a top performer in one year will result in being a top performer the following year 15% of the time. Eighty-five per cent of the time it does not work.
4. Watch your fees
Fees do matter and yet so many people I meet have no clue what they are paying in fees. Study after study says that fees have a direct impact on your long-term performance.
5. Stay engaged
I suspect money is important to you. If so, you have to care about your money enough to stay engaged. It takes hard work to make money, so you need to invest some time into protecting and managing it. Don't ignore your portfolio and if you need to make that RRSP contribution this month, do it! If you don't care, who will?
It has been wisely said that within every young person there is an old person, who will eventually ask one day: "Did you think of me when you were young?" Make your answer: "YES!"
Peter J. Merrick is a Certified Financial Planner and author of The Essential Individual Pension Plan Handbook. He will be appearing throughout the day on CTV News Channel to answer your RRSP questions on Sunday, Feb. 13. You may submit your questions in the comments section below at CTV.ca.