Although markets have rebounded slightly, 2016 has not been kind to investors. It’s tough to stomach any loss, but when it comes to our Registered Retirement Savings Plan (RRSP), some of us tend to overreact.
Since our RRSP is meant for long term savings, what’s happening now in the markets shouldn’t really matter. However if the value of our portfolio is declining or it hasn’t grown, it’s worth taking a second look at our investments to try and figure out if we’re on the right track.
Reason 1: The Markets are Down
This is the only reason why our portfolio would have decreased in value, and unfortunately that’s the situation we find ourselves in right now. Keep in mind that these downturns are perfectly normal; markets don’t always go up in value.
This is actually an opportunity for investors since stocks are on “sale”. Think about it: when prices are down, we’re able to buy more than we normally could; it’s similar to buying things on sale at the grocery store. It’s impossible to know when the markets will hit the bottom, so a solid strategy is to simply invest every month so we can take advantage of dollar cost averaging.
Reason 2: You Don’t Have Growth Assets
When it comes to investing, there are two kinds of asset classes: equities and fixed income. Equities (stocks, ETFs) are the things that have growth potential, whereas fixed income (GICs, Bonds) is safe investments meant to protect your money.
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There are a variety of reasons why we might be heavy in fixed income assets, but I would say the majority of time it’s due to a lack of knowledge. As new investors, we tend to take recommendations from our bank or HR department, but they may not know what they’re talking about. Too often we find ourselves invested in funds that really don’t fit into our long term plan.
Reason 3: Wrong Asset Allocation
Asset allocation is the balance between equities and fixed income in our portfolios. As you’ve just learned, having too many assets in fixed income won’t help our portfolios so how do we determine what’s the right balance?
To simplify things, the younger we are, the more equities we should have. The reason for this is since our retirement date is so far away; we’ll have plenty of time to recover in the event of a market correction. For those of us who’re getting close to retirement, we’ll want more fixed income since we may need to withdraw that money in the near future.
Reason 4: Too Many Investments
Diversifying your portfolio is always a good idea, but it’s entirely possible to have too many investments. I’ve seen portfolios with 15+ mutual funds covering almost every asset class possible. Not every mutual fund can be a winner, so often the losses in one fund will cancel any gains in another.
A better strategy would to simply purchase index funds in the four major classes: Canadian bonds, Canadian stocks, U.S. stocks, and International stocks. This may sound boring, but it has been proven to be an effective way of investing.
The Final Word
For our portfolios to grow, we need to accept a certain amount of risk and invest in equities. That being said fixed income also has a place in our portfolios since they provide us with stability. Regardless of what happens in the markets, the best strategy is to stick to our financial plan.