that, with recent market turmoil, British Columbians are likely to
put less into their RRSPs this year. Bad idea! But a good idea –
especially now – may be what one advisor calls ‘disciplined
PETER MITHAM; Illustration by KATHY BOAKE
season should be at its height but many economists expect the final
tallies will show that contributions for the season – which ends
March 2, 2009 – will be down from previous years.
B.C. residents contributed $4.7 billion to RRSPs last year, or an
average of more than $3,000 a person. The national average was
$2,780 a person.
RRSPs – Registered Retirement Savings Plans – are a time-honoured
way we in Canada have of stashing away a few dollars with the
ostensible aim of preparing for retirement but with the more
immediate goal of snagging tax deductions. The investment, after
all, is sheltered from taxes – meaning taxes aren’t owing on
contributions until they’re withdrawn.
But plummeting markets in the months leading up to the current
investment season have sapped not just consumer confidence but
confidence in the potential of the markets to deliver a return.
Just 31 per cent of those eligible made contributions last year,
and the percentage could be less this year. Those who do contribute
could very well contribute less.
But the behaviour goes against the grain of everything the advisors
tell us: If we’re to buy low and sell high, then now is a far
better time to invest than last year was. And if we’re to make
regular contributions that allow us to ride market swings and worry
less about the peaks and valleys of the market, then a) we
shouldn’t be fretting about the current environment because we’ve
been contributing all along, and b) a lump-sum investment now
stands a better chance of appreciation than it did a year ago
(hindsight bears out that comment).
We’ve all been burned, however.
that burning sensation most people can’t escape when it comes to
considering new investments, especially in a volatile market like
the current one.
Jonathon Palfrey, a senior vice-president with Leith Wheeler
Investment Counsel Ltd. in Vancouver, says a disciplined approach
can offer hope.
change your investment horizon based on market fluctuations,” says
Palfrey, who works primarily with the private-client wing of the
firm. “It pays over time to stay invested and to avoid making
emotional decisions after markets have declined.
like chasing high returning stocks at the top of market is a bad
idea, chasing low returning investments near the bottom of a market
can be just as damaging.”
shattered portfolio may take time, but there are ways of addressing
The first is to get advice, starting with a thorough analysis of
your portfolio. While it may not pay to ditch good investments that
have tanked, any portfolio bears regular examination and
potentially rebalancing in order to meet investment objectives.
A number of banks have stepped forward with check-up programs
catering to customers anxious about their own financial health, and
Palfrey agrees that during difficult times a reassessment is
attractive. The key – as in good times – is not to let past
performance influence expectations for the future.
“It is easy to look back and expect what happened most recently to
occur again in the near future,” Palfrey says. “Avoid that mistake
and be forward-looking in the assessment of an
The second step is to improve diversification. Putting your nest
eggs in one basket isn’t wise if you’ve got so many eggs the basket
breaks; using two or more baskets is a better way to go about
growing and protecting your portfolio.
As your portfolio grows, Palfrey says it makes sense to diversify
into other options that provide good opportunities for growth while
sheltering you from risk. While diversification strategies have
been tested in the current market, which has sent so many sectors
sideways, Palfrey emphasizes its ongoing importance.
“A balanced investor with a well-diversified portfolio has
generally not been able to avoid weak returns in 2008,” he says.
“However, since it is virtually impossible to predict the future
returns of markets over the short term with any certainty, a
diversified portfolio still makes sense over a full market
Again, that can mean rejigging a portfolio with a view to finding
investment opportunities that meet both the emotional and financial
needs of the investor. A portfolio whose value was weighted 70 per
cent to stocks and 30 per cent to bonds may require what Palfrey
terms “disciplined rebalancing” through the sale of high-priced
bonds and the purchase of stocks that are valued below the
long-term value they offer (and with the potential to appreciate
back to regular levels).
The success of discipline and paying a portfolio some focused
attention is borne out by past market cycles. Larry Jacobson, a
principal with Macdonald, Shymko & Co. Ltd. in Vancouver,
advises his clients never to react to headlines. Writing in a
recent letter to clients, he pointed out that investors who sought
to capitalize on market fluctuations rather than pursuing a
disciplined strategy saw significantly lower returns than those who
had invested a single sum and let it be. Jacobson, citing figures
from investment research firm Dalbar, noted that the average mutual
fund investor who sought to time the market between 1987 and 2005
saw a 3.5 per cent annual compounded return. An investor who stayed
put garnered a 10.8 per cent annual compounded return.
Similarly, in the 21 years following October 19, 1987, when the Dow
Jones Industrial Average dropped 508 points to close at 1,739, a
portfolio of large-cap U.S. equities rose approximately nine per
cent a year.
“The markets are extraordinarily resilient,” he said during a
recent interview. “Yeah, we’ve had some significant swings and
volatility. They will come back. Now, will they come back to the
12,000 that we left the Dow at a few months ago? It probably will.
I don’t know when. But it probably will. It’s a question of time.”