The tech meltdown, September 11 and the consequences of both left many RRSP holders frozen in the headlights. Others bolted for cash. With the dust seeming to settle, it's time for a strategy review.

No one is going to blame you if you've got a case of the jitters about your registered retirement savings plan. The investment climate during the past 18 months or so can hardly be described as confidence-inspiring.

We've been scorched by the tech meltdown, industrialized economies have stumbled and, just as the ugly "R" word began to be heard, the horrific events of September and the campaign against terrorism rocked the globe.

For many RRSP investors, the results have not been pretty. Returns have been pummelled. Continuing volatility has spawned an unprecedented degree of uncertainty.

Where will markets and interest rates go? What should you do with the investments already in your plan? And what about this year's contribution, assuming it's not in your plan already? The deadline for tax-deductible contributions--March 1--is rapidly approaching.

Professional financial advisors are virtually unanimous about what RRSP investors should do first: Get a grip. Don't panic over the dive your stocks or equity mutual funds may have taken. Although you might be sorely tempted to dump them, such a reaction would probably not be wise.

Reducing equity exposure on those grounds is "a very dangerous slope to start down, because sooner or later you'll find that equities will start to show why people invested in them-they'll rebound from the doldrums we're in. Trying to time the market is a mug's game, and we've seen that time and time again," says Warren Baldwin, financial planner.

In early October, Stuart Kedwell, portfolio manager, noted that the prospect of interest rate cuts from the U.S. Federal Reserve Board, coupled with aggressive U.S. government spending in late 2001, may turn the economy around this year-and the long nose of the stock market will anticipate that. This, says Kedwell, "is a time for clear, calm thought about the equity markets."

In any event, research has found that emotions often lead investors to read too much into recent events, even though those events might not reflect long-term realities, says Patricia Lovett-Reid, managing director. Investors, she adds, should "keep their emotions in check when making financial decisions."

If you have a carefully constructed investment strategy-probably worked out with an advisor-stay with the program, she says. Assuming the plan is well-built, accounting for such crucial things as your goals, investment time horizon, risk tolerance and the need to diversify among assets and investment styles, big changes should not be necessary.

"If your portfolio is aligned to who you are as an investor," says Lovett-Reid, "I probably would not make wholesale changes now, because this is a typical market cycle. Not necessarily the events leading up to it, but I would stick to the plan."

A good plan features a diversified asset mix-the proportion of equities, fixed-income securities and cash in a portfolio-that's in harmony with your personality, comfort level and retirement goals. In fact, says Lovett-Reid, "The degree to which the drop in your portfolio keeps you up at night is a litmus test of how appropriately it was constructed in the first place."

The importance of asset mix can't be minimized. It determines about 90 per cent of the return on your portfolio, Baldwin points out. While asset mixes vary to suit the individual, financial advisors have general suggestions that may help you find the right fit.

A risk-averse, income-seeking investor, says Lovett-Reid, could have as much as 70 per cent of his or her portfolio in fixed-income investments. The remaining 30 per cent could be spread among U.S. equities (12 per cent) and international and Canadian equities (nine per cent each). Someone seeking a more balanced approach with a bias toward growth could construct a portfolio this way: fixed-income investments, 40 per cent; U.S. equity, 25 per cent; international equity, 18 per cent; and Canadian equity, 17 per cent.

For those comfortable shouldering a relatively high degree of risk, greater exposure to equities is appropriate. Here, you might look at fixed-income investments of 20 per cent, U.S. equity of 34 per cent, international equity of 25 per cent and Canadian equity of 21 per cent, she says.

Across the risk spectrum

Conservative investors could have between 10 and 40 per cent of their portfolio in cash, 50 to 80 per cent in fixed-income and 10 to 30 per cent in equities, for instance. At the other end of the risk spectrum, an aggressive investor might want 0 to 60 per cent in cash, 10 to 70 per cent in fixed-income and 30 to 90 per cent in equities.

Assuming the equity portion contains mutual funds, investors should diversify among management styles, notes Adrian Mastracci of KCM Wealth Management Inc., a Vancouver based fee-only financial planner. A mix of value and growth funds, for instance, would be prudent.

"The fundamental point," says Baldwin, "is to get a comfortable equity position, one that is reasonable for the investor, and commit to that program."

There doubtless are cases in which portfolio performance and comfort levels just don't line up. This could be the result of not having a plan in the first place or having a badly constructed one, perhaps based on an overestimation of risk tolerance. As Lovett-Reid points out: "Many people have not been through a bear market like the one we are going through now and are realizing that they can't necessarily afford the types of losses they have in their portfolio, given the overconcentration in a particular asset class or sector."

You might have thought, for instance, that you fit the profile of an aggressive, growth-oriented investor, and so put 80 per cent of your plan in equities. But now market volatility keeps you up at night. Says Lovett-Reid: "You owe it to yourself and your financial future to say, 'I've made some mistakes and I'm going to correct them.'" In this case, she advises, you should rebalance, perhaps by bringing the equity component to 60 per cent.

In the process of rebalancing-or investing this year's contributions, for that matter-beware the "fund du jour" approach to investing, the experts warn. Every RRSP season, some investors are overcome by the lure of one or two hot performers and load up on them. A while back, Asian mutual funds, particularly Japan funds, flew off the shelves. Another year, everybody had to have clone funds; then index funds, and so on.

"If you stay with the noise of the day-if that becomes your reason for doing something-you're going to be doing the wrong thing most of the time," says Mastracci. If your advisor is now pushing a new investment, ask why you shouldn't instead put more money into your original selections. Is there something wrong with them? If so, should you be reducing your exposure?

Above all, say the experts, RRSP investors should put today's investment climate in perspective. Market dives and periods of extreme volatility have been followed by more prosperous times. The key is to establish what you want from your RRSP and devise a plan that fits. Sure, minor rebalancing may be needed, but a solid plan will always deliver the goods.
 

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.