February was the third worst performing month for the NASDAQ in its history, the worst performing for the S&P in two years and, thanks to Nortel, one of the worst months since the crash of 1987 for the TSE.
After all that punishment, it is no coincidence that RRSP contributions are way down. It is only human nature to become more cautious when things get tough.
For the investor with a short time horizon, one to two years, caution is advised. However, the average investor has 15-20 years before retirement and, in that time horizon, market timing rarely works.
Foregoing RRSP contributions at any given time is a mistake. You may be thinking: “Hey, good advice, but a little late.” It’s not too late, though, to start planning your 2001 RRSP contribution.
Saving for retirement should be a methodical, almost boring, process and the best strategy is one where contributions are made monthly. This allows you to take advantage of dollar cost averaging or, simply put, spreading your purchases throughout the year so you are less susceptible to individual market swings.
This also means that you don’t need to worry how the market is performing on the day you make your contribution. Remember, it is not about getting the best price today, but rather the best average price over the next 15-20 years.
Moreover, after a truly terrible year or month, the odds are in your favour that you are closer to the bottom than the top. If you have less than $100,000 in your RRSP portfolio, keep the plan simple and choose three or four mutual funds that cover Canadian, foreign, small cap and large cap equities and some form of fixed income.
As your assets grow, you can introduce more complicated investment strategies. Complicated simply refers to how much extra time and effort you need to devote to your investments. This is more important as your portfolio grows, because you need to judge the value of your time.
If 10 extra hours of time on your portfolio may result in a two-per-cent greater return, for a $100,000 investment the gain could be lost in the hours you spent managing instead of working or playing with your kids. But, spending the same amount of time on a $500,000 investment can pay off.
Treat your investment plan as you treat your job and put a value on your time. A general rule of thumb often quoted in the marketplace is to invest in the same percentage of guaranteed investments as your age. In other words, if you are 50, own 50-per-cent bonds.
That rule is misleading. Your actual age is less important than how long you have until you retire and how much money you believe you will need when you get there. If you are 50 and do not want to retire until 65, you have a relatively long time horizon and it may be appropriate to have more than 50 per cent in bonds.
Whether you use a professional to help you or not, you should think through your investment objectives and risk tolerance. This will allow you to develop the mix of equities and fixed income investments that is right for you and put you one step closer to your retirement.
(Evan Spiropoulos is a portfolio manager of the Norrep Fund, a public small-cap fund managed by Hesperian Capital Management.)
