Blogs & Comment

More on where to invest

As the RRSP season comes to an end, many people are engaged in the last-minute rush to make a contribution. Others may have already contributed but the money is just sitting there as cash. For the sake of theseprocrastinators, let’s look at whereRRSPs (or portfolios in general) can be invested.
Where invest your RRSP contribution?
The character known as James, in David Chiltons The Wealth Barber, had an interesting approach to investing his RRSP contributions. When the stock market was in a bullish phase, he put his contribution into conservative, interest-bearing investments like GICs or bonds (this also helped diversify his total wealth since he had economically sensitive investments, such as real-estate properties, outside his RRSP). But if the stock market was in a bearish phase, he put his RRSP contribution into the stock market to buy low, you know.
A stockbroker passed on a similar strategyto me earlier this year. He was a deep-value investor and didnt see much to tempt him in the stock market at the present time, sohe was going to direct funds toward reducing his mortgage. Compared to GICs and the like, the (implied) return would be higher –i.e. equal to before-tax income that would have to be earned to pay the 4% to 6% interest on a mortgage.
What point are we at now in the business and market cycle? Stocks have nearly doubled over the last two years. They are no longer great bargains and there are several risks such as rising oil prices and tightening monetary policy in China. However, the historical norm for bull markets implies another 18 to 24 months to go.
We thus seem to be in kind of a grey area: its not a year like 2002 or 2009 when stocks should be bought; nor is it 2000 or 2007 when it would be better to buy GICs or bonds or pay down the mortgage and other debt. We seem to be in the phase when the choice between conservative or growth investments depends more upon the risk tolerances of the individual investor.
What asset allocation?
Conventional thinking says that the allocation to stocks should be high when you are young. Specifically, as the rule of thumb goes, the percentage of stocks should equal 1-age. But William Bernstein writes in The Investors Manifesto: If youve never been tested before [by a bear market], I strongly urge that you encounter your first bear market conservatively invested.
I can understand that. A bear market is likely to be harder on the nerves for a newbie and the risk is they could flee at the bottom and be shy of stock-market exposure ever afterward. Sure, set the percentage of stocks equal to their age but why not do it after the bear market strikes and stocks are way down?