RRSP 104: What Should I Invest in My RRSP account?

Key Takeaways

• Careful consideration is required when selecting “qualified assets” for RRSP investments. Understanding the advantages and disadvantages of various assets such as cash, GICs, and stocks can assist in making informed investment decisions.
• Balancing risk and return is crucial when designing an investment portfolio, and following modern investment theory can help maximize expected returns.

The purpose of our investments is to achieve returns. Does that mean the higher the return, the better the investment? Not necessarily. Nobel laureate Harry Markowitz, in the Modern Portfolio Theory, emphasizes that when designing a portfolio, one should seek to maximize expected returns based on a given level of risk. In other words, before investing, it is crucial to assess one’s risk tolerance and then choose investments within that range that offer the highest expected returns. Pursuing high returns without considering risk may lead to unfavourable outcomes since the risk associated with each asset varies.

Regardless of the type of asset being invested in, it is essential to understand that RRSP assets must be “Qualified Investments.” Placing non-qualified assets into the registered account may result in penalties.

Here are some qualified investments:

• Cash
• GICs
• Market-Linked GICs
• Bonds and T-Bills
• Equities
• Mutual funds
• Segregated Funds
• Gold and silver bars
• Exchange Traded Funds (ETFs)
• Small business investments, etc.

Asset Class Comparison

Cash

“No risk, no return.” This couldn’t be any more true for investing in cash. The most significant advantage of cash is that it carries no risk, but its major drawback is the lack of returns, making it somewhat “dry.” When considering inflation, the return on cash is typically negative.

Pros: No risk
Cons: No returns

Guaranteed Investment Certificates (GICs)

Guaranteed Investment Certificates (GICs) are widely used investment products. Their most significant advantage lies in the guaranteed investment returns. As long as the financial or insurance institution selling GICs does not go bankrupt, you can retrieve your entire investment.

Even in the event of a financial institution failure, CDIC or Assuris provides up to $100,000 in coverage for “eligible deposits“. Detailed coverage conditions can be accessed through their official websites by clicking the above links.

However, the primary drawbacks of GICs are their low yield and limited liquidity. Due to the inability to withdraw most fixed-term deposits prematurely, accessing funds in emergencies may be challenging, mainly due to their poor liquidity.

Pros: No risk, guaranteed returns
Cons: Low yield, liquidity risk, potential inability to withdraw funds prematurely

Market Linked GICs

Market Linked Guaranteed Investment Certificates, a relatively new investment approach, fall under the category of hybrid investment instruments. Similar to traditional GICs, this investment option guarantees your returns, and eligible deposits are also covered by CDIC or Assuris for up to $100,000. Unlike traditional GICs, your returns are not fixed; instead, they are linked to the performance of chosen underlying investments, such as stock market or bond returns. When the market performs well, your investment returns can surpass those of traditional GICs significantly. In less favorable market conditions, your principal is still protected, addressing the lower yield drawback of traditional GICs.

However, Market Linked GICs come with some drawbacks, with the most notable being a longer holding period requirement, typically ranging from 3 to 5 years. Withdrawing the investment prematurely may result in the loss of guaranteed returns and potential risks of losses. Therefore, if considering this type of product, it is crucial to ensure you are willing to hold the investment until maturity to receive the guarantee of investment returns.

Pros: No investment risk, guaranteed returns linked to the performance of underlying investments
Cons: Liquidity risk. You need to hold the investment until maturity to secure the guaranteed minimum return

Bonds and Treasury Bills

Bonds and Treasury Bills are typically categorized as fixed-income investments. Investing in bonds involves two primary risks, with the first being interest rate risk. Bond prices have an inverse relationship with interest rates. When interest rates decrease, bond prices rise, allowing investors to potentially earn higher returns. Conversely, in times of rising interest rates, bond prices fall, leading to a corresponding reduction in investment returns.

The second risk is credit risk (company default risk). Investing in government bonds usually does not involve credit risk, but if investing in corporate bonds, there is a possibility that investors may not recover their principal if the company defaults.

Pros: Lower investment risk compared to stocks
Cons: Relatively low returns, and credit risk exists for corporate bonds

Equities (Stocks)

Stocks are perhaps the most common investment choice, highly favoured for their potential high returns. However, the drawback of stock investments lies in their high risk, with investors facing the possibility of losing their entire principal. Surveys indicate that individual investors, commonly referred to as retail investors, often find it challenging to profit in the market. In reality, most retail investors experience losses, with only a small minority achieving stability or profitability. Therefore, it is crucial to effectively manage risks before investing in stocks.

Pros: Potential for high returns
Cons: High risk, especially if unfamiliar with the stock market, with the potential to lose the entire principal

Mutual Funds

Mutual funds are investment vehicles where professional fund managers manage investors’ funds. Each mutual fund has independent investment objectives, allowing investors to choose funds that align with their risk tolerance and return requirements. For investors with limited knowledge of investments, opting for mutual funds is a good choice.

Pros: Professional management, diversified investments
Cons: Returns are not guaranteed, and there may be a small amount of fund management fees

Segregated Funds

Segregated funds are very similar to mutual funds and are managed by professional investment managers. However, the most significant advantage of segregated funds is their “principal protection” feature. Under certain conditions, these funds can provide protection for the invested principal.

Typically, segregated funds offer two types of protection mechanisms. First is maturity guarantee, where investors, after holding the fund for a specified period, can receive a guarantee of 75% to 100% of the principal at maturity, as per the fund contract. The second is death benefit guarantee, where if the investor passes away, the beneficiary can receive a guarantee of 75% to 100% of the principal.

For investors seeking to secure their principal, segregated funds are an excellent choice. Since each segregated fund has different requirements for “principal protection,” it is essential to consult with your investment advisor before investing to understand the specific terms and conditions.

Pros: Professional management, diversified investments, and “principal protection” feature
Cons: Returns are not guaranteed, and there may be a small amount of fund management fees

Tips: Asset Allocation

As mentioned above, there are various types of assets that can be invested in RRSP. The saying goes, “Don’t put all your eggs in one basket.” Therefore, when making RRSP investments, it is crucial to allocate assets reasonably to reduce overall risk.

We all understand that RRSP is an excellent retirement plan. If your contribution deadline is approaching, but you are not ready with enough cash for investment, you might consider using an RRSP loan. In the RRSP 201, we will discuss in detail how to maximize your contributions through RRSP loans, ensuring you take full advantage of this superior retirement plan.

For more RRSP-related articles, please visit our RRSP Registered Retirement Savings Plan Guide.

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Last Updated: February 4, 2024
Published Date: February 24, 2020

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