Oh where, oh where, to invest that RRSP contribution when stock, bonds, commodities and virtually all other assets have run up in price so much? Or, for that matter, where to deploy those cash balances still sitting on the sidelines?
Many will feel comfortable jumping in at this stage — and they could still do well riding the momentum for awhile longer. Others, however, may not feel so comfortable putting their savings at risk.
A stockbroker’s rather refreshing solution
The latter group might consider what John (a stockbroker I recently interviewed) plans to do. He likes to buy out-of-favour dividend stocks for his portfolio but, as he told me, he was now having a hard time finding solid companies paying good yields.
So he was going to focus less on investing, and more on paying down his mortgage and other debt. He would refocus on investing whenever the stock market had another severe correction and there were bargains to snap up.
Paying down debtmakes sense because it provides an implicit return equal to the before-tax income that would have to be earned to pay the interest rate on the the debt. On a credit card, the return could easily be over 20%; on a mortgage at 5%, the return could be 7% depending on your tax bracket.
Returns like these beat owning a GIC or bond yielding 1% to 3% in an RRSP. And they are very competitive with stocks and commodities, yet come with virtually no risk.
I’m not much of a fan of RRSPsanyway. In fact, I would be temptedto get idle cash out of an RRSP. One way is to swap it for non-registered securities.