Stages of Investing RRSPs

How you invest your RRSPs will depend on what stage of investing you are at. In this article we explore investing through as a progression or evolution of your RRSP assets. The more money you have in your RRSPs, the more sophisticated you can get.

Stage 1: Single investment investing.

When you are just beginning to invest, you are likely to start small picking one or two investments at a particular institution. If you are conservative, you might invest in a GIC. Otherwise, you could buy one or two mutual funds. Often a balanced fund is a great place to start because it offers investors the greatest diversification without having to have a significant amount of capital. Balanced funds offer some of the best risk/return tradeoffs.

Stage 2: Single company investing.

As your investment grows and you continue to add money to your portfolio, you are likely to increase the number of different investments. In this case, you might have more than 1 GIC or more than one mutual fund. However, it is likely that you will continue to invest within the same company. For example, you might go to a bank and invest in a number of different mutual funds. While you have diversified the number and types of investments, you are still within the product shelf of a particular company.

This stage of investing is quite common for portfolios less than $50,000. Sometimes you will see investors who have gone to an institution and bought a number of funds and when they reach a certain threshold, they go to another financial institution and invest in another group of funds.

According to my research, I believe that not all mutual funds are created equal - there are good funds and there are bad funds. I also believe that every financial institution has good funds and bad funds. No single company has the corner on all the best products, nor the worst products. Thus, if you employ 'single company investing" you are guaranteed to have a combination of good and bad investments. Yet, it is important for investors to go through this stage because it is difficult to get too sophisticated without a significant sum of money.

Stage 3: Self Directed RRSPs

The average Canadian RRSP investor has something on the order of 2.4 plans. That's a bit odd, given that there are so many advantages to holding a single consolidated self-directed plan.

Once you reach a certain portfolio size, you should consider the benefits of a Self-Directed RRSP. The advantages are both practical and economical. On the practical side, you will have less paperwork, fewer statements and fewer tax receipts. You will also get a more complete picture of your overall portfolio.

On the economical side, a self-directed plan also makes sense. It can give investors access to a full-range of investments - not just one company's mutual funds but funds from all companies, individual stocks, T-bills, strip bonds, Canada Savings Bonds, GICs and whatever other choices are needed to achieve the optimal asset mix. It also allows for more efficient use and tracking of the foreign content.

Another important advantage to a self-directed RRSP is that it eases the conversion at age 69 (or sooner) to a self-directed Registered Retirement Income Fund (RRIF). Many of the advantages of a self-directed RRSP also apply to a self-directed RRIF, but the administrative advantages are more notable. Multiple RRIFs complicate record keeping because RRIF rules require a minimum annual withdrawal from each RRIF, an investor with monthly payouts on each of three RRIFs must handle 36 cheques each year. When you add in the plan statements, confirmations and tax slips, that's a lot of excess paperwork.

The downside to Self-Directed Plans is they typically have a trustee fee ranging anywhere from $50 to $200 per year. Therefore it is important to reach a certain threshold before self-directing. You should avoid self-directing until you have $30,000 to $50,000 in RRSPs. At this point it is easier to justify the annual trustee fee and consolidating your RRSP plans will make sense. Everyone's situation is unique so be sure to weigh the pros and cons before you self-direct.

For more information on Self-Directed RRSPs, read this article

Stage 4: Wrap accounts and Private Wealth Management

There is an increasing amount of information on Wrap accounts and they have been promoted as the next step beyond mutual funds and Self-Directed Plans. Be very careful with these generalizations, as some wrap accounts are simply glorified "single company investment" plans. Many wrap accounts belong between stage 2 and 3 because you are still investing in a single company's product shelf. There are more wrap accounts being offered but most are more sizzle than substance. Watch the fees and make sure you take the time to understand the individual investments within the wrap product.

For more information on High net worth investing, read this article

Jim Yih has been helping people make better decisions with money for the past 20 years through his articles, workshops, and financial products. For more information on Jim and his services, visit www.RetireHappy.ca