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By Adrian Mastracci
"Portfolio Management"
Financial Post
RRSP Tactics, Special Reports
January 15, 2002
Much is written about which securities to select for registered
retirement savings plans, with headlines such as the top 10 funds,
or the best 10 stocks, or perhaps the 10 must have, all seeking
your attention.
But before you venture into the investment fray, you should fully
assemble an RRSP strategy. The same applies for registered retirement
income funds.
Investors spend too much time selecting individual stocks and mutual
funds and too little time on the investment strategies they should
follow to reach their RRSP goals. It is the latter that inflicts
real damage to the portfolio.
Managing an RRSP should be a marathon, not a 100-metre dash --
especially as the RRSP/RRIF combination spans an investor's lifetime,
and often a spouse's lifetime.
Therefore, RRSP strategy is about long-term perspectives. An investment
horizon of at least five years, often much longer, is appropriate
for a retirement plan because of its long-term nature. Someone at
age 65 can easily have a 15- to 25-year planning horizon because
of potential life expectancies. So there is no need to maintain
a short perspective.
In setting up a portfolio, the first question investors should
ask is, "What is important about having an RRSP?"
Adrian Mastracci, fee-only investment counsel
says, “RRSP strategy is like building your home—the plan
comes first, and some assembly is required.”
For some, a comfortable retirement is uppermost. For others, RRSPs
are their major investment. Investors near or in retirement may
concentrate on preserving that nest egg.
Young investors may attach importance to long-term growth -- and
practically everyone wants to minimize income taxes.
There are many different answers to this question, but no matter
the reason, everyone needs a comprehensive strategy.
The best advice is to park the intended contribution while you
assemble a strategy.
Here are a few key principles to assist investors in setting a
strategy:
- Make security selection the last task, not the first.
- Consider personal goals, risk tolerance, investment horizon
and suitable diversification.
- Determine your investment personality: conservative, income,
balanced, growth, aggressive or speculative.
- Forget chasing the best-performing stock or fund. That is an
excellent strategy on how to get burned.
- Calculate the investment rate of return required to reach financial
independence. Then measure your RRSP investment success against
it. Your financial advisor can help you determine your rate of
return.
- Treat that personal rate of return as your minimum RRSP investment
benchmark. Is yours 3%, 5%, 9%, 12% or have you reached your goal?
A 50-year-old man who wants to retire at 60 with $60,000 of before-tax
annual income needs a portfolio of about $1,450,000 by age 60. Women
need about $150,000 more because of longer life expectancy. This
illustrates the need to assemble a sound strategy, especially for
investors whose RRSPs will form a substantial portion of retirement
income.
Asset allocation decisions -- which involve choosing asset classes,
such as cash, bonds and equities -- also have a significant impact
on portfolios, as does picking, say, the size of companies.
According to 1990 Nobel Prize-winning studies of 100 pension funds,
asset allocation explained, on average, 94% of the contribution
to total return. Stock selection and market-timing strategies were
a distant 4% and 2%, respectively.
Clearly, asset allocation should be the focus of all RRSP strategies.
Experience shows investors who concentrate on strategy make better
portfolio selections. They are also rewarded with returns more in
keeping with expectations.
RRSP strategy is like building your home -- the plan comes first,
and some assembly is required.
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