By: Jonathan Chevreau National Post FP Money Saturday, February 15, 2003

Canadians will put 20% less in their RRSPs this year and shift to more conservative investments, a recent TD Bank poll revealed.

With two weeks to go to the March 3 deadline, "conservative is definitely the word this RRSP season," agrees fee-only planner Leonard Hughes.

Stocks threaten a fourth down year, but fund analyst Duff Young says the risk of investing in stocks is lower. "Now's the time to buy because they're cheap."

How much risk an RRSP should take on depends on age and other sources of retirement income, such as corporate pensions, says fee-only advisor Adrian Mastracci of KCM Wealth Management. If you have a large non-registered stock portfolio, tax considerations favour overweighting RRSPs with fixed income.

The 10 RRSP ideas here start with the least risk (and return) and get steadily more aggressive.

1. Cash or equivalents: With interest rates at 40-year lows and ready to rise, long-term bonds have more risk than short-term or cash. Treasury bills, GICs, Canada Savings Bonds and money market funds have tiny yields but provide safety and still generate RRSP receipts. You'll enjoy the "bull market in cash" if stocks languish.
   
   High-interest savings accounts at ING Direct and MRS Trust pay 3%. The Stingy Investor's Norm Rothery likes T-bill funds from Altamira and Perigee. Maximize GIC payouts through deposit brokers at www.fcidb.com.
   
   
2. Fill gaps in strip ladder: Get higher yields and hedge against reinvestment risk by building a "ladder" of strip bonds maturing from one to 10 years out or more. Longer maturities are riskier if rates rise so now's a good time to fill ladder gaps just a few years out. Financial planner Jim Otar suggests maturities should average five years.
   
   
3. Bond funds and bond ETFs: At today's rates, Management Expense Ratios ( MERs) chew up much of the yield in bond mutual funds. Try no-load funds like PH&N Bond or own government bonds directly. Or hold five- or 10-year Canadas via two Barclays bond exchange traded funds (ETFs), with MERs of 0.25%.
   
   Active bond managers have a better shot at adding value in corporate bond funds. Broker Nate Mechanic suggests dividing fixed income 70% safety and 30% corporate bonds. Stick with funds holding bonds rated BBB or better and avoid high-yield "junk" bond funds. Consider Trimark Advantage Bond, AGF Canadian Total Return Bond and -- for global bonds -- C.I. World Bond.
   
   
4. Real return bonds: Real return bonds pay about 3% currently, but the payout rises with inflation (hence the term "real return"). RRBs are comparable to investing in long-term bonds (more than 10 years out). TD Bank has a RRB bond fund but its MER consumes a good chunk of the return.
   
   
5. Index linked GICs or segregated funds: RRSP investors torn between stocks and bonds might consider the banks' index-linked GICs. The more underlying stock indexes rise, the more interest these hybrid GICs pay. These are not true capital gains, so should be held in RRSPs. If markets fall, no interest is paid, but initial capital and precious RRSP contribution room are preserved.
   
   Insurance segregated funds have high MERs but can buy you protection. Agent Paul Barbour cites a client who locked $220,000 in a seg fund before the market tanked. Market value fell to $68,000 but in 2012, she gets the full $220,000 back.
   
   
6. Income trusts: Income trusts are high-yielding equities between bonds and equities on the risk/return spectrum. If rates rise, yields may fall off. Advisor Jim Rogers thinks they are better RRIF products than RRSP accumulation vehicles. Tax treatment of return of capital may make them better non-registered investments.
   
   If you pick your own trusts, spread them across power, energy, business, consumer and real estate trusts. Use the S rating system: S1 is highly rated, S7 is the lowest.
   
   If you don't mind the MERs, try a "basket" approach through Sentry Select Diversified, Citadel, or Saxon High Income Fund. For REIT exposure, consider Barclays iREIT, an ETF invested in 12 REITs with a MER of 0.55%.
   
   
7. Low-fee balanced funds: These provide active management of asset classes and stocks. Purists don't like them because the fee also applies to the bond portion. But younger investors with small portfolios can do worse than Rothery's suggestion of PH&N Balanced (MER 0.86%), Perigee Accufund, McLean Budden Balanced or advisor Jane Baker's recommendation of Bissett Canadian Balanced (MER 0.94%). Otar likes Trimark Income Growth and Cundill Global Balanced.
   
   
8. Dividend funds: These held up well in the downturn, but rising rates could hurt dividend funds. Because of the dividend tax credit, these may better be held in non-registered plans. Conservative investors who only have RRSPs can try Rothery's suggestion of PH&N Dividend and Scotia Canadian Dividend or fund analyst Steve Kangas's picks of Royal Dividend and BMO Dividend. An alternative is Barclays iFin (MER 0.55%), invested in banks, insurance and fund stocks.
   
   
9. Canadian equity funds or ETFs: RRSPs must be 70% Canadian content, so growth investors need Canadian equities. Actively managed funds like ABC Fundamental Value or Trimark Canadian make sense in this environment but many large-cap funds own the same stocks. You can bypass their MERs through the Barclays i60s (MER 0.17%), which owns the top 60 TSX stocks. Active management is more likely to pay off for small or mid caps, Young says.
   
   
10. Foreign equity funds: For tax reasons, foreign equity ETFs should be held outside RRSPs and actively managed funds inside the 30% foreign content of RRSPs. Avoid sector funds in RRSPs. Kangas favours global value funds like Trimark or Ivy Foreign Equity; Rothery likes Mawer World Investment and Saxon World Growth.

This may be the place for aggressive investors to hold hedge funds, but the conservative route of using "fund of fund" structures entails hefty fees.

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.