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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, January 26, 2003
Achieving diversification within your registered accounts
takes many forms and some thought. This applies to all
registered plans, such as the RRSP, RRIF and the lesser
known DPSP and RCA.
RRSP diversification offers you long-term portfolio
protection in the markets, especially during bear markets.
Designing prudent diversification strategy for registered
plans assists in attaining those personal goals sooner.
Managing a diversified RRSP is truly a marathon. Especially
as the RRSP/RRIF combination spans the investor’s
lifetime. Perhaps, also the spouse’s lifetime.
First, ask the question, What
is important about the RRSP to you?
Many say it is the preservation of the nest egg, some
emphasize growth of the portfolio, while others say
it is the income stream for a comfortable retirement.
Then consider these ingredients to design RRSP diversification
strategy:
- Determine your investment personality: conservative,
income, balanced, growth, aggressive or speculative.
- Relate the amount of prudent diversification to
your investment time horizon.
- Asset allocation decisions provide the biggest
form of diversification. That is, your allocation
among classes of assets such as cash, bonds and equities.
- Asset allocation decisions explain, on average,
94% of the contribution to total portfolio return.
- Stay within your appropriate asset allocation targets.
As markets drift, you may rebalance periodically,
such as when new deposits are made.
- Portfolios ought to contain a variety of asset
classes that do not all move in the same direction.
- A ladder of interest rate maturities is an effective
way of protecting against the ravages of falling interest
rates. This strategy likely avoids all maturities
occurring during low interest rate periods.
- Keep every single investment vehicle, such as a
stock, to a maximum of 4% to 5% of portfolio value.
- Make sure that your investment time horizon is
at least 5 years, preferably 7 to 10 years. Equities
may be too risky for short time horizons.
- Consider where to incur the risk of equities. Some
choose to concentrate the fixed income investments
in the RRSP and the equity investments outside the
RRSP.
- Understand the risks incurred inside an RRSP. A
capital loss in an RRSP becomes a real loss because
there is no offset against any capital gain.
- Be aware of the quality of the investment versus
its yield. Especially for those at or nearing retirement.
Seeking higher yields at the expense of quality is
a dangerous game.
- Another form of diversification is whether you
adopt a passive or active investment strategy. A core
of one and a sprinkling of the other may be an appropriate
pursuit.
- Plan on some of your well diversified investments
to result in losses.
- Performance has been over emphasized to death.
Emphasis on consistent returns is better than emphasis
on hot performance -- even if you are well diversified.
If you are not comfortable with the diversification
of your RRSP portfolio, seek other opinions. Your retirement
nest egg depends on it.
Properly designed diversification strategy is essential
for RRSP portfolios. Make your diversification strategy
your friend in uncertain times like the present. And,
better yet, for the longer term.
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