Boost your RRSP in 2013


(Illustration: Ryan Inzana)

In recent years, most Canadians have played it safe, adding dividend-paying stocks and government bonds to their portfolios. That’s no surprise; after seeing their nest eggs shrink during the 2008–09 crisis, who would want to put their money at risk again? But with the world economy slowly improving and bond returns shrivelling, now looks like the time to shift from defence to offence. As this year’s RRSP deadline approaches, add some punch to your portfolio.

You don’t need to spend hours boning up on the markets. Even if you’ve got just five minutes and a limited understanding of the investment universe, this quick tune-up guide can help you add thousands of dollars to your savings this year. By rebalancing and topping up on benchmark-busting investments, you can ensure your RRSP account takes advantage of market advances without putting too much at risk.

The first place to start? Sell off some of your low-returning bonds, says Bob Gorman, chief portfolio strategist with TD Waterhouse. Then look beyond the big names that everyone else is buying. Add stocks or funds in some cyclical sectors, and look to fast-growing emerging markets as well.

What you buy will depend on your level of knowledge, risk tolerance and investing style, but every investor should keep this one goal in mind: buy things that won’t lose money. You can’t claim capital losses in an RRSP portfolio, notes Jolene Laing, an associate portfolio manager with ScotiaMcLeod, so if something goes awry the money is gone forever. Don’t worry, though. We explain what types of securities different investors should hold in their RRSP accounts. Follow the basics first, then add a little oomph, and watch your savings grow.

The Five-Minute Option: Balanced mutual funds

If saving for retirement baffles you, buying a single balanced mutual fund is a good place to start. Investors get access to a diversified basket of equities and fixed-income assets in the same fund. It sounds too easy, but some of the lower-priced balanced funds have delivered better returns than many sophisticated investors get, year after year.

The typical balanced fund holds 50% stocks and 50% bonds, but the asset allocation can vary, says Roland Chalupka, chief investment officer at Fiduciary Trust Co. of Canada. In fact, funds can hold between 35% and 75% of either stocks or bonds. Funds with a higher weighting of equities are typically more volatile—they don’t always post positive returns—and charge higher fees than those that hold more bonds.

In the past, investors have done well with one or two balanced funds, often a Canadian one and a global fund. Another option is fund of funds. Rather than holding individual stocks and bonds, these funds hold a number of equity and fixed-income mutual funds. The only problem with these is that they often carry very high fees, so make sure you don’t pay more than 2% a year. They usually come in easily understood styles—conservative, moderate, balanced, growth and aggressive. “It’s like a pension,” says Ottawa-based fee-only financial planner Robert Abboud.

Whatever kind of fund you choose, carefully read the risk tolerance profile that’s stated on the fund’s mandate and confirm, either by looking at its current holdings or the assessments of independent rating services, whether the fund’s manager is sticking to the plan. You don’t want to buy a growth fund only to find out later that it’s actually conservative, says Salman Ahmed, associate director of active funds research at Morningstar Canada. Also, look to see if the manager adds value through tactical allocation, meaning he or she can do something outside their mandate if conditions warrant. “If a manager thinks that equities will outperform in the short-term, they may go 65% stocks instead of the usual 60%.”

One criticism often levelled at balanced funds (indeed, all mutual funds) is their relatively high management fees. To a degree, this is inevitable; you’re paying someone else to make the detailed investment decisions for you. But it’s still advisable to look for lower-fee funds, those with management expense ratios (MER) of about 2% or less. That number reflects the amount of your portfolio that the fund company is charging you every year—for example, $2,000 on a $100,000 account—which ends up being subtracted from your returns. You can’t control your return on the year, but you can control the bite taken out of it by fees.

Once you pick the right fund, you can leave it alone. “These are the way to go for the novice investor,” says Chalupka. “You get instant diversification, and you don’t have to go out and buy a high-yield bond yourself.”

The 15-minute option: Mutual fund portfolios

Investors who want to hold a basket of funds in their RRSPs should start with essentials, says Chalupka, including a Canadian, U.S. and international equity fund, and a bond fund. While it depends on time horizon and whether you think other parts of the world will do better than Canada this year, a typical equity allocation would include 50% of assets in a domestic Canadian fund, 25% in an American one and 25% in the international investment. More risk-tolerant investors, however, can play with that mix by adding a growth fund, which often performs well in improving economic conditions. Small-cap funds may also boost returns, as they typically do well in healthier markets too. “You’re looking for something that will add a little beta to a portfolio,” he says—the higher the beta the more volatile the fund—“because it’s these funds that will lead us out of a bear market and into an upswing.”

If you do want to add some less traditional funds, don’t just add the investment with the biggest beta. Ahmed suggests buying securities that have a lower correlation to your core equity funds. Adding seemingly riskier commodity and emerging-market funds can actually help smooth out your portfolio’s ups and downs if they tend not to move in lockstep with your core funds.

Be careful about buying too many funds: you can end up forking over hefty fees if you try to get too adventurous, says Ahmed. Plus, with fewer funds it’s easier to keep track of performance. Buying one or two country or sector funds, especially in an area that’s in the midst of a recovery, won’t be too costly and should give you the boost you’re looking for. “Narrow down on sectors if you feel a certain exposure is lacking,” he says.

The 30-minute option: Exchange-traded fund (ETF) portfolios

Over the past several years, many Canadians have traded in their mutual funds for ETFs to take advantage of the liquidity and lower fees. The best way to do that is to open a discount brokerage account specifically for your RRSP. Most banks offer them, though you may find lower transaction fees (less than $20 per trade) with a dedicated online broker. The cost of placing orders is worth keeping in mind; there’s no point in paying out on transaction fees what you saved on management fees.

While the RRSP building blocks are the same whether you buy an ETF or mutual fund—you want exposure to Canadian, U.S. and international equity, and at least one bond fund—it’s easier to make a mistake with ETFs; there is no professional fund manager keeping an eye on your risk exposure. A basic portfolio should be roughly split 20% for each of Canadian, U.S. and international equity and 40% bonds. Simple index funds such as XIU, which tracks the S&P/TSX 60, will fit the bill, says Yves Rebetez, managing director of investment research firm ETF Insight. No more than a fifth of an RRSP should be allocated to more aggressive picks.

ETFs make it easy to buy specific sectors. Be aware, however, that many of these niche funds have rocky returns. Also, be sure to check whether the fund is leveraged or not, and check whether the ETF you’re eyeing is made up of actual stocks or derivatives. Most “plain vanilla” funds, as Larry Berman, partner and chief investment officer with ETF Capital Management, calls them, hold actual equities, but many others are created using futures, options, swaps and other products that involve third-party contracts. These funds are riskier than the pure equity ETFs.

Fortunately, the ETF industry is much more transparent than the mutual fund business, so it’s not hard to find out what’s in a fund. But be sure to do your due diligence. Many funds follow the same sectors or countries, so if all else is equal, buy the one with the lowest expense ratio, says Berman. They can, however, vary slightly. Some have more exposure to certain sectors, hold more companies or are hedged back to Canadian dollars, so think hard about which fund fits.

The one-hour plus option: Individual stocks and bonds

The challenge stock-pickers face building an RRSP portfolio is that their best skills may go to waste saving for retirement. RRSP accounts are for boring, conservative holdings, ScotiaMcLeod’s Jolene Laing makes clear. If you want to buy a sizzling micro-cap, put it in a non-registered account. She also keeps most of her clients’ assets in domestic stocks. “I’ve never been interested in playing the currency market as well as the stock market,” she says.

Gorman says that do-it-yourself investors can create a balanced RRSP portfolio by holding 10 to 20 stocks across all sectors (a couple of stocks per industry) and one bond fund or ETF for the fixed-income portion.

Gorman is finding opportunities in the U.S. and in sectors that are under-represented in Canada. The technology industry, for instance, is undervalued, but has room to grow. Investors may also want to look at companies tied to the housing sector. Home Depot is on Gorman’s 2013 short list. He thinks it’ll continue to do well as the home-renovation market recovers. Laing is looking at fertilizer stocks, which tend to peak in spring, as well as material stocks, like gold companies, which have massively underperformed the run-up in the price of gold itself.

When venturing out into more cyclical sectors or growth stocks, it’s important not to forget some basic stock-picking rules. Look for businesses that have little or no debt, growth in earnings and low price-to-earnings or price-to-book valuations. “Don’t reach,” says Gorman. “High-quality companies with good value will always do better.”