RRSP Season – Again?

RRSP season is almost upon us!  We’ve been told time and again that we need to make a contribution to save for our future.  The hard part is not so much making the contribution as deciding where to put it.

Early in my media career it was mandated that I take an arms-length approach to investing.  If I mentioned a stock on air it was thought that the media attention could move the stock price.  It didn’t happen, or at least not that often, but it did force me to invest differently.  I’m not a financial planner, but personally I figure that my best investment is simply not letting the government take my money away from me.  My return, in that context, is based on my tax rate.

If I’m taxed at 18 percent, then I ‘earn’ 18 percent by saving on taxes, even for a small contribution.  18 percent is almost twice the result for the Canadian stock market did in 2014!   The trick is to try to keep that, maybe to grow it.

The simplest solution is to put ones money in the bank.  You earn next to nothing, but you know that it’ll be there when you need it.  Pretty lame.  The next best solution is to earn some interest.  That would mean investing in the bond market.  Over the past 3 decades that’s proven to be a good idea as interest rates generally declined; as rates fall, bond values go up.  The problem now is that interest rates are near historic lows.  If rates go up from here, then bond prices will go down.  Sure, if you hold bonds until they mature you’ll get your capital back plus any interest they’ve paid, but the wait is the problem.  Government bonds may be the safest place to invest but they pay the poorest rates.

To get any kind of return, an investor is faced with taking on more risk.  That risk is manageable, but requires expertise and the returns may be only slightly better than marginal.  If an investor is willing to take on even a bit of risk, then the stock market is the place to look.  Over the past year, global markets were up 2.1% as measured by the Dow Jones Global Index.  That’s hardly robust and the range was very broad: The Merval (Argentina) was up 59%, the Russian Trading System Index was down 45% (both in US$ terms).  Closer to home, over the past 5 years the S&P/TSX Composite faired OK at up 23%, but underperformed the US’s S&P 500 which was up almost 80%!

For 2015 it’d be easy to make recommendations, and many do.  What’s lost on many investors is that those recommendations are dynamic – they change over time!  For example, the oil and gas sector has been hurting as oil prices have declined significantly from a year ago, and can go lower, but there’s a point at which the stocks themselves start to represent some very real value.

Here’s where I throw in the towel!  In my early media days I put my money into mutual funds.  They were diversified globally and across sectors, plus professionally managed.  Over time I realized that many, no … most, fund managers didn’t beat their benchmark indices.  If the Dow Jones was up 10% then the large-cap American fund in which I was invested, often wasn’t!   That hurt!  I expected more!  Some of these managers I knew and respected, but the markets were beating them!

I was so disappointed that I took things into my own hands I bought some ETFs (Exchange Traded Funds) that tracked their indices in sort of a ‘If-you-can’t-beat-‘em-join-’em’ approach.  I bought some blue-chip stocks and harvested dividends. That was fine until the market corrected.  The blue-chips collapsed and the indices screamed lower.

I’ve come to realize that the biggest service that a professional manager can give is giving decent growth while protecting capital when things go sour.  They call it upside and downside capture.  If the market is up 100, how much did the manager get?  More than 90 percent of that?  If it’s down, how much is the manager down?  I’m back to using mutual funds a lot, stock and bond.  The markets are sure to be volatile as interest rates change and the economy lurches forward.  I need someone to watch-over my investments.  Do I make the most money?  No.  Do I care?  No?  I’m looking to keep most of what I’ve kept from the tax man … maybe grow it.