Investing your RRSP contribution

Every year at this time, every financial institution fights for your RRSP dollars. Investors now face more choices than ever. Getting through all this confusion and clutter to make the right decision is no easy task.

Here are some thoughts for investing this year:

Fixed income alternatives

1. High interest daily savings accounts. For some of you who are busy and unable to make a quick decision, parking money into a daily savings account might be the best temporary solution. For example, Manulife Bank has a Daily Savings rate for RRSPs of 2.8%. There are no fees to set up the account, nor are there fees to redeem the account. You can access the funds whenever you want.

2. Guaranteed investment certificates. Disillusioned investors are going full circle back to the world of guarantees. While interest rates remain low, GICs could be the best investment to provide peace of mind with capital guarantees. If you plan to go back to the conservative world, keep in mind that not all GICs are the same and it is as important as ever to shop products and rates.

3. High yield bonds. Junk bonds are making their way into the news again, but this time disguised as high yield bonds. While the term 'junk bond' may turn you off, remember that everything goes in cycles and that high yield bonds have some merits. Typically, HYB are bonds offered by corporations and the yields today are impressive, ranging from 7% to 12%. Remember that the higher the interest rate on the bond, the higher the credit risk of the corporation. The key to high yield bonds is to understand the credit and price risks. You may want to leave these decisions in the hands of a good mutual fund manager.

Moderate risk

4. Balanced funds. Balanced funds are a great middle ground. With so many confusing market outlooks by both the pessimists and the optimists, a balanced approach could provide the security of fixed income but the growth potential of participating in a rebounding market.

5. Dividend funds. Historically speaking, dividend funds have been a great way to participate in equity markets in a more conservative way. Dividend-paying stocks are usually well-known blue chip companies. They are more conservative because they are equity investments with some characteristics of fixed income investments.

Higher risk

6. Global equities. With all the negative publicity of markets, it is hard to understand why anyone would invest into world markets. But we may be sitting on one of the best investment opportunities of a lifetime. For anyone who believes that markets go in cycles, the global markets may be the best place for your RRSP dollars. Global markets have lost money for three calendar years now and we have to go back to 1929 to see the last time they have lost money for four years in a row. The probability of upside is now greater than the probability of further downside.

7. Equity funds with high cash holdings. Another way to play the equity markets is with high cash holdings. Some mutual fund managers have really defensive positions with lots of cash. This is a really great position to be in these days because a further downside will be minimized if markets continue to go down. On the other hand, cash is powerful because it can be used to buy new positions at much lower prices. One well known example is the AIC American Focused Fund run by Larry Sarbit, with over 80% held in cash.

My two cents

Whether you are conservative or aggressive, there should be something on my list of seven ideas for the RRSP season. While many investors are turning to the more conservative investments this year, remember that money is often made by doing what most people are not doing.

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Jim Yih is author of Mutual Fundamentals and Seven Strategies to Guarantee Your Investments. He is the founder of CORE Financial Advisors and Account Representative of Manulife Securities International Ltd. Commissions. Jim can be reached through his Web sites Wealthweb.ca, Retirehappy.ca, COREFinancial.ca and JimYih.com.