No magic bullet for smart RRSP investing in 2013

As Canadians prepare to set aside some of their hard-earned cash this RRSP season, many will be looking for the next hot investment trend, but few financial experts believe there will be one magic bullet when it comes to choosing how to invest your tax-sheltered retirement savings in 2013 — or at any other time, for that matter, given that everyone's financial situation is different.

People looking to invest their RRSPs have many options — from newer, more hands-on products like exchange-traded funds and real estate investment trusts to traditional investment vehicles such as guaranteed investment certificates and mutual funds. The relative popularity of these products fluctuates from year to year, but given the current economic climate, most advisers are urging their clients to diversify their portfolio and to expect market volatility at worst and stagnation at best from the market in 2013.

Consider the big picture: in 2012, the S&P/TSX composite index finished at 12,433.53, gaining just four per cent from a year earlier. Over the previous 10 years, annual gains have averaged close to eight per cent.

It never did better than the 12,788 level it reached at the end of February, making it among the developed world's worst-performing stock markets for the year.

Some sectors of the economy did well. The financial industry, which includes banks, insurance companies and mutual fund companies, was up almost 13 per cent in 2012. Industrials (including CN, CP and Bombardier) were also up by about 13 per cent.

Gold, on the other hand, was down almost 20 per cent, and the energy sector (including oil and gas companies) had a downward year, losing about 7.8 per cent. The mining sector was down as well, dropping around 10.2 per cent.

"It has been a very volatile year, and I don't see any signs of that changing," said David Phipps, a senior financial adviser with Assante Capital Management in Ottawa.

"It makes people unhappy that they are starting to get used to it, but they are. I would describe the new normal as low return with high volatility, which is extremely unpleasant."

Investment advisers working in such a low-return environment have to be prudent with the choices they make on behalf of their clients.

"There is not a lot of wiggle room for errors," Phipps said.

David Stronach, a fee-only financial planner in Toronto, agrees that the investment mood in 2012 was grim, and 2013 is not looking any brighter.

"I don't think anyone is feeling good," he said.

"I think everyone is extremely cautious right now, and there is not a great deal of optimism."

For that reason, most people are taking what Stronach describes as "an ultraconservative stance."

Adrian Mastracci, president of KCM Wealth Management in Vancouver, says investors should expect "a lot of bumpiness" in 2013, while on the other side of the country, in Charlottetown, financial planner Blair Corkum says what investors need to ride out those bumps is patience.

"Volatility hasn't been dramatic this year. It's just been flat," he said.

Whatever the economic climate in any given year, people should be clear about what they are doing when they set money aside in an RRSP — and not equate it with investing, warned Jamie Golombek, managing director of tax and estate planning with CIBC in Toronto.

"People confuse making an RSP contribution with the stock market," he said.

"Making an RSP contribution is just setting aside some of your current year's income to spend later on. It has nothing to do with the stock market per se."

Still, the question lingers, if they do decide to invest the money in their RRSPs, is there any hot trend or investment of choice for the coming year?

The real risk in even asking the question is that what was hot last year might not be as good a bet this year.

"Any time you see something that did really well last year, a red flag should go up," said Phipps.

The best thing to do is think twice, he says.

"You should pause and say, 'If it had a good rate of return now, I should be nervous'."

Mastracci also advises against jumping on any investment bandwagon.

"We like to stay away from the popular stuff, because popular things tend to cool off quickly," he said.

"Most people miss the exit."

For Stronach, the key survival tactic for the current economic environment is to be broadly diversified — and that means diversifying stocks as well as asset classes.

Golombek says most of his clients are choosing just such a strategy, taking a balanced approach and considering a combination of equities, fixed-income investments and "even some cash."

Phipps also sees diversification as the smartest investment approach in 2013.

"In this period and time of uncertainty, as boring and unpleasant as it sounds, diversification is your friend," he said.

In terms of trends, exchange traded funds, or ETFs, an asset class whose popularity and size has skyrocketed in the past two years, remain a popular and useful way to invest, experts say.

"ETFs are probably more popular than ever," Mastracci said.

As of the end of November 2012, there were 282 ETFs listed on the TSX, including 49 launched since the start of the year. All together, they were worth $65.5 billion

"ETFs are a very useful tool and should be incorporated in most people's portfolios," advises Phipps.

"My impression is that ETFs are more popular today than they were a year ago. They continue to gain ground as a valid tool to be included in the tool box.

"Where I would disagree is with people who see them as the only way to invest — or as a complete solution."

Stronach says ETFs can be useful but they're not for everyone.

"I like them," he said. "But I find most people don't have the temperament for them. It's a smart investment for those who would like to use passive management for the core of their portfolios."

Mastracci also cautions that having ETFs may make sense but only as part of a complete plan worked out with a financial adviser.

He says it's important to ask what is in them and what you are trying to use them for.

"Forget everyone else. What is it you need to do?" he said.

A key strategy this year, as in every year, should be careful planning. That includes having a plan for when you will invest and for how long.

A good starting point is avoiding the last-minute scramble to invest at the end of RRSP season.

"I find it ironic that people call it RSP season," says Stronach. "That's because you don't think about it the rest of the year."

A better approach, he says, is to set up your saving and investing "so there is no thinking to do when RSP season comes — and goes."

In other words, forget the concept of an RRSP "deadline," which, says Stronach, is designed for the "last-minute shopper."

He instead recommends that investors practice steady, disciplined saving all year long.

"The ones who are committed to be successful financially are the ones who are habitual savers," he said.

Stronach encourages his clients to recognize their own strengths and weaknesses, especially if, historically, they have not been good savers.

"Some people know they are not good at money and should be contributing on a monthly basis," he said.

"If you know yourself, it's a good idea to get into the habit to have it taken directly from your bank account."

Corkum agrees that having a disciplined savings strategy is more important than the rate of return on your investments.

He sees more and more of his clients making monthly RRSP contributions, meaning there's a lot less pressure when the February or March deadline arrives.

Following the ups and downs of the stock market — not to mention the economic and political news around the world — can be distracting and discouraging, financial advisers say.

"The worst thing you can do is react," said Stronach.

Phipps agrees, saying educating yourself will help you understand and weather economic storms.

"Most investors would be well served by putting down their daily newspaper and by picking up an economic text book," he said.

Corkum agrees that it's never too early to begin educating yourself about finances.

"Financial literacy should be taught in schools," he said. "It is critical at every age."

This year, like every year, should see investors reviewing their RRSP holdings. That always includes rebalancing your portfolio and can also include getting a second opinion.

"Rebalancing is just one in a long list of annual chores that every investor should be doing and that every investment adviser should be proactively suggesting to their client," said Phipps.

Portfolio rebalancing is a realistic target for most people and should be done at least annually, he says.

Stronach suggest investors have a face to face with their adviser at least twice a year to assess where their portfolio is at — and where is should be.

"If you don't have a lot of money, you're not typically going to get a lot of motivation from the adviser to pay attention to it, so you have to drive it," he said.

Corkum, however, warns that people should use discretion when it comes to rebalancing, particularly if an account is set up to automatically rebalance holdings when the market is low.

"I do not think automatic rebalancing is necessarily the smartest thing to do," he said.

There are real risks in trying to "time the market," Corkum said.

If you are not sure your investments are on the right track, get a second opinion.

"I would suggest that a second opinion be worthwhile to everyone, particularly since second opinions are free from most financial planning organizations," Corkum said.

"If you really want the comfort that you are not being oversold, then deal with a fee-only financial planner that sells no product."

Whatever your income level, there is always room to set some money aside for retirement, say many financial advisers.

"I have seen people making $25,000-$30,000 a year setting money aside for retirement and/or for their children's education, and I have seen people making in excess of $100,000 somehow unable to set any money aside," said Corkum.

Investing those savings is easy enough to do yourself, with the right preparation, he says.

"My most successful investors are people who have done it themselves," said Corkum, who also runs retirement seminars for the P.E.I. Public Service Commission.

"They are people who are very interested in the market, read the financial articles, watch the TV channels with business shows."

Golombek agrees that the most important message to get out to Canadians is not about a particular investment product or strategy but about saving itself.

"Save for the rainy day. Save for retirement," he said. "Just do it."