The Portfolio Doctor

By David Cruise and Alison Griffiths
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The hawkers are out in full force. We're not sure which is worse every February, the retail industry exhorting us to buy, buy, buy chocolate, flowers and baubles for Valentine's Day or the investment industry exhorting us to buy, buy, buy funds and other product for our RRSPs.

At a time of year when most are getting out from under Christmas bills, it all seems like cruel and unusual punishment for the beleaguered consumer.

Here are a few rules to keep you sane during what remains of the February RRSP madness.

1. If you are a poor or undisciplined saver, do contribute to your RRSPs even if you don't need the tax deduction. You can always carry it forward to be used in future years. The RRSP naysayers are a growing crowd and they have a point about devoting savings to non-registered investments rather than registered ones.

However, human behavior being what it is, money that is rattling around in a non-registered account can be too tempting for words. I'll just nip a bit off the top, you say, and spend it on a flashier car, a top loading washer or an exotic vacation.

2. On the other hand, don't contribute more than you can comfortably afford. One of the reasons folks dip into their RRSPs or resort to credit cards they can't pay off every month is because they have not budgeted properly. Contributing to an RRSP and leaving yourself short of cash for essentials or emergency purchases is asking for trouble down the road.

3. Disciplined savers who do not need the tax deduction are probably served better by keeping their investments in a non-registered account. Just make sure your investments don't give you a tax headache.

Bonds, cash and tax inefficient mutual funds can turn into a liability. The last thing you want is to be bumped into a higher tax bracket because you are earning interest income or tax inefficient distribution income.

4. Be very cautious about borrowing to invest in an RRSP. Investment advisers can get you an RRSP loan almost overnight and many will waive any loan application or processing fees.

If you don't have the cash on hand and you can use the deduction, the strategy can make sense. As long as you use your tax refund to pay down the loan, everything looks rosy.

But here's where danger lies. When the refund cheque arrives, the world has an uncanny knack of throwing an unexpected bill our way at the very same time. You spend the refund cheque, rationalizing that the loan will be paid off by this time next year anyway.

And that leads us to another pitfall. Loans which lurk around past the next RRSP season inhibit you from contributing the following year or, worse, put you in the position of having to borrow again to contribute. It doesn't take too many years before saving for retirement has turned into a long term debt which keeps renewing itself year after year.

Even so, the strategy can work if interest rates stay low and the equity market bulls along. But here's another pitfall. The constant RRSP borrower can get trapped by rising rates and\or a sagging market. The whole point of registered accounts, aside from saving for retirement, is to shelter gains and income from taxes until you start withdrawing the funds from a RRIF.

But if you save $1000 on your taxes, spend $400 on interest and lose $800 on your investments you are actually worse off.

5. Don't be persuaded into investing a lump sum into your RRSP. Dollar cost averaging, or investing over time, produces better results for most investors.

Unfortunately, advisers are prone to urging us to invest our RRSP contribution all at once, especially if the money has been borrowed. We'd rather see you divide your contribution into at least four investment packets throughout the year. That way you have a better chance of evening out the markets ups and downs.

While you may not get it right every year, if you follow this gradual investment approach over time you will do better than an investor who invests everything in February every year.

Having said that, if you have a small amount of money and are buying stocks or exchange traded funds, you are better off saving up until you have $3000 to $4000 and then making one or two purchases, otherwise you lose too much in trading fees.

6. Don't be seduced by too-good-to-be-true returns. For example, ads recently by Scotiabank Group list impressive returns for Scotia Canadian Dividend Fund and Scotia Selected Aggressive Growth Fund. One and three-year returns for the former are an impressive 12.8 per cent and 15.63 per cent while the growth fund clocks in at 12.18 and 9.99 per cent.

Then, in a box immediately beside the funds' returns we see 10.41 per cent for the Market Powered GIC. Wow! Great performance and safety too. What's not to love?

However, pick up your specs and examine the fine print. While this product is linked to the performance of the equity market, the guarantee itself is actually only 2 per cent per year. The 10.41 per cent figure, which is positioned to look like it is similar to past performances of the listed mutual funds, is arrived at by compounding that 2 per cent and re-investing the interest. If it is safety you want you can do better with a high interest bank account.

The other bit of fine print indicates that the term is five years and the product is not redeemable. So, we'd call this investment a gamble. You don't know how the market will have fared five years from now and in the meantime you are getting a lower-than-GIC rate.

TD Canada Trust is also advertising a "secure" product called Security GIC Plus with a guaranteed 8 per cent return over three years. If your brain is in mutual fund gear, you will be thinking 8 per cent on average every year. Nope. It is a total of 8 per cent at the end of three years which is equivalent to an annual interest rate of 2.6 per cent

So, read the fine print and make sure your RRSP strategy makes sense for you.