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RRSPs: Where Should I Park My Money?

The March 1 RRSP deadline can loom large for many. How much you put in RRSPs may have been committed some time ago, however where to put that money to first not lose it and then, perhaps, make money isn’t an easy decision.

The S&P/TSX Index has put on 200 points since Sept. 1, as of late 2010. That’s a two per cent jump, not a great deal, but seemingly an end to the sideways moves the market made for most of 2010. Leading the way are resource stocks which been thriving. Gold is setting new records and silver is too. At the head of the pack, cotton futures have set new records for runway price momentum. The latter market is run by professionals and is no place for amateurs. But commodity leadership is where it’s at right now.

In the wider economy, with prospects for growth seemingly dimming each day, companies that depend on business volume have reason to worry. “Canada’s economic recovery has been relegated to the slow lane,” says Adrienne Warren, an economist with Scotiabank’s Global Economic Research department in Toronto. “Real GDP growth moderated to just a 1.0 per cent annual rate in the third quarter of 2010, less than half the already more muted second-quarter advance. Moreover, output edged down slightly in September.”

Thus the question: if the underlying economy is weak, should private investors be pursuing hot stocks? After all, investments make the most sense when there is solid reason for them to rise.

Behind a stock there should be sales and earnings growth. Behind a bond, a solid and improving balance sheet.


But that is not how it is right now. True, the worse fears of the double dip recession seem to have been put to sleep, but beneath the recessionary anxiety there is still fact and reason. Wall Street and Bay Street have been doing very well. Yet out on Main Street, the recession isn’t over.

U.S. home values could drop by more than US$1.7 trillion in 2010 when all the data is in, reports Zillow Inc., a Seattle-based company that provides home price data.

The decline in home values means that more American home owners owe more on their mortgages than their homes are worth. The percentage of homeowners with negative equity reached 23.2 per cent in the third quarter of 2010, up from 21.8 per cent in the end of 2009, Zillow reported. Homeowners’ spending power has collapsed.

A weak recovery implies a low demand for loanable funds by business. There is not a lot of new plant or office space that needs to be built in the present economy. That means banks won’t have high rates of loan growth. And that in turn means that all non-government credit markets from bank loans to corporate bonds will continue to have relatively low interest rates both in the U.S. and in Canada.

The Bank of Canada has given no signal that it plans to raise interest rates. The overnight rate which is used as a bellwether by all credit markets is one per cent.

Canada’s GDP growth is a sluggish one per cent at annual rates, reports Bloomberg LP. Given the risks implicit in the Canadian economy, investors are demanding another 143 basis points — about 1.5 per cent more — than the 3.18 per cent that Government of Canada 10 year bonds currently pay. Bond interest rates spiked on Dec. 10. The cause? Worries about growing government debt. That’s not a good reason for a rise in rates.

Under these conditions, many bond investors are willing to accept low returns for the safety they seek. But investors who want to make a decent living from their capital are opting for equity risk in stocks. Indeed, the recent performance of the TSX suggests that it could be on a roll to make up for a year of sideways performance.

For the 11 months of 2010 ended Nov. 30, Canadian equity mutual funds returned a respectable 7.80 per cent compared to 9 per cent for Asia Pacific equity funds. The best performing sector was precious metals, up 51.48 per cent for the 11 months. Canadian small to mid-cap equity funds gained 18.52 per cent while commodity funds in general gained 16.25 per cent and natural resources equity fund gained 23.44 per cent in the period.


Financial markets don’t move in straight lines. Often, it is one year’s crummiest performers that jump ahead in the next. On the list of really bad performers in the 11 months ended Nov. 30, are real estate equity funds, up just a tenth of a per cent for the period, science and technology funds, up 0.07 per cent and U.S. equity funds, up 0.05 per cent in the period. The worst performing positive sector was U.S. money market funds, which returned about 7/10,000 of one per cent. For absolute losses, however, the winner was European equity, down 5.75 per cent for the 11 months.

Whether gold and silver will continue their rise in 2011 is a speculation. Gold bugs like to point out that the US$805 price of gold per ounce in 1981 is still less on an inflation-adjusted basis than today’s US$1,425 per ounce price. They estimate that gold should be trading in a range of about US$2,200 just to equal the 1981 price. Oil is up many more time than gold, they reason, so gold has a long way to go.

“Gold is seen as an alternative currency,” explains Benoit Poliquin, vice president of Pallas Athena Investment Counsel in Ottawa. “So as the U.S. dollar declines, gold should rise. During the crisis of 2008, gold fell below US$750. It is both a currency and an asset class. For now, both qualities look good. But there is a lot of money chasing it.

The process is speculative. Ever more people chasing a finite resource forces its price to go up. There will be a break when interest rates rise

continuedonthebottompag e24 and the carrying cost of gold, which is lost interest, rises. That will be the event that triggers what could be a big drop in the price of gold.”

Gold and other commodities are now running on price momentum or, another way of putting it, on the greater fool theory that there will always be someone else more foolish to pay even more. Nevertheless, gold has a rationale — the printing of money by central banks intent on keeping their economies afloat will produce inflation. On that basis, Tony Warzel, CEO and portfolio manager of Rival Capital Management Inc., which runs a hedge portfolio, is sticking with gold. “You can’t fight a bull market,” he says.

The problem with all gold and other resource investments is their historical volatility. After all, the less diverse a portfolio, the more it can be driven by a single force or commodity. And funds don’t get much narrower than gold. Take away the momentum behind the run gold is having and its price could tumble. For now, gold is the hare in the race with other sectors, all of which seems turtles in comparison.

“It’s better not to bet on the hare in a race with the tortoise,” says Graeme Egan, a financial advisor with KCM Wealth Management Inc. in Vancouver. “The hare usually wins, but it also can stumble and that’s when the reptile can pull ahead. Safety means diversifying your bets and putting some money on the relative certainty of bonds. Moreover, bonds return their capital; stocks never promise to do that.”


So we come to the bottom line: how much money should be in stocks, how much in bonds and how much in cash? For that, it’s important to look at the pillars of personal finance: income, pension and investment cash flow. A government pension is much like a bond. That goes for Canada Pension Plan and Old Age Security as well. If your income is substantially supported by government-guaranteed income, you can take some stock risk. But with increasing age, the time to recover from a bad time in the stock market is limited.

The usual rule is to go with a bond level equal to age. So if you’re 60, have 60 per cent bonds or equivalent pension income. At 70, one should have 70 per cent bonds. If government pensions make up 15 per cent of pre-tax incomes, you can increase stocks accordingly.

Within the stock allocation, diversification is the key to walking away from problems with your shirt still on your back. Broad market exposure through mutual funds or stock ETFs is key. If you want to gamble that gold will continue its rise, limit it to what you could afford to lose if your bet turns out badly. Never forget that the goal is investing is, first and foremost, not to lose money— especially if it’s your retirement nest egg.

AndrewAllentuck’snationalbestselling book,WhenCanIRetire?PlanningYour FinancialLifeAfterWork(Penguin,2011), revisedpaperbackedition,isonsalenow.

About the author


Andrew Allentuck’s book, “Cherished Fortune: Build Your Portfolio Like Your Own Business,” written with co-author Benoit Poliquin, was recently published by Dundurn Press.



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