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Five things to know about RRSP season

Canadians are jittery about their registered retirement savings plan contributions this year, and justifiably so.

With the deadline for contributions for the 2008 tax year looming next week, an Ipsos Reid poll found that one-quarter of Canadian investors are either "anxious" or "panicking" about their retirement savings. And while more people say they plan to contribute to RRSPs than last year, more than one-third of people with existing plans say they'll either contribute less than previous years or contribute nothing.

The tentative tone is to be expected. Not only is the slumping economy causing many people to tighten their belts, but many investors have been frightened away by months of plunging markets that have set their financial plans back by years. Almost one-third of Canadians said they are steering clear of equity investments this year in favour of lower-risk options.

While that means that more than two-thirds of retirement investors are still willing to brave the stock market, they are looking at a very different landscape than a year ago. Here are a few bumps on that landscape to ponder as investors make decisions about what role equities might play in their RRSP plans.


Feeling tempted to shift your asset mix toward such defensive holdings as bonds and to scale back on equities? Know this: You already have.

For a diversified portfolio, even if you made no changes over the past year, the relative size of the equity component has shrunk, while defensive holdings now make up a bigger proportion.

The S&P/TSX composite index is down more than 40 per cent since last year's RRSP deadline, while money market and bond funds have risen. Even if you made no changes to your portfolio over the past year, the relative size of the equity component has shrunk drastically, while defensive holdings now make up a bigger proportion of your savings.

For some, that means a defensive rebalancing might not be necessary; the markets have done the work for you. But for others with longer investing horizons and/or higher risk tolerance, you might want to focus this year's contributions on equities or shift some holdings out of fixed income and into stocks - simply to return to your desired asset mix.


If diving head-first back into stocks scares you, consider an alternative that is coming back into vogue: balanced funds.

These funds maintain part of their holdings in equities and part in bonds. They fell out of fashion during the bull market, but interest in them returned as markets topped out and aging investors adopted more conservative strategies. Data from the Investment Funds Institute of Canada show that global balanced funds are the best-selling long-term fund class over the past two years, while domestic balanced fund sales have far outpaced pure equity funds.

"[Balanced funds] are a good way to get back into the market," said Don Reed, president of Franklin Templeton Investments Corp., which launched two new balanced funds for this RRSP season. "[Investors] can participate somewhat in the upside of equities, while maintaining the protection from the bond component."


There have been only three instances since 1950 that the S&P 500 has managed a significant gain for the year when it posted a loss in January. That doesn't bode well for 2009.

The S&P 500 dropped 8.8 per cent in the first month of this year, while the S&P/TSX composite index lost 3.3 per cent. In the past 58 years, the S&P 500 has never had a January decline that big and finished the year in the black.

That said, the S&P 500 is now down more than 15 per cent for the year to date, while the S&P/TSX is down nearly 12 per cent. Markets could make significant gains in the next 10 months and still leave the January barometer intact.


Over the long run, index funds have outperformed nine out of 10 actively managed funds, thanks chiefly to much lower fees and costs. However, S&P recently reported that active managers beat index funds in the fourth quarter of 2008 - consistent with active managers' reputation for outperformance in declining markets.

Critics pointed out that this was due to increased cash holdings - partly due to the need to pay for investor redemptions, and partly to the managers' own reluctance to pour more money into the market sinkhole. Still, it speaks volumes about the wisdom of keeping some cash on the sidelines during short-term market dives - whether you do it yourself, or let your active fund manager do it for you.


There's one segment of the stock market that's paying handsomely to park your money there while you wait for the market to come back to life: The financial sector.

Financials have become a dirty word in recent months, but analysts insist that the Canadian banking sector is much more stable than most of its global peers, and should weather the economic and credit woes better than most.

In the meantime, the S&P/TSX financial subindex is generating a dividend yield of a startling 7.5 per cent. That means that even if those already-cheap banking stocks go nowhere in the next 12 months, investors today will still see a very healthy return.

The danger, many analysts have noted, is that some names in the sector may have to cut their dividends in the coming months; in fact, the low market prices and high yields are reflecting that risk. But others believe that risk, especially with most of the big banks, remains low.

© 2007 The Globe and Mail. All rights reserved.

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