Why RRSP investors should rebalance away from stocks

Stocks may be rising, but there are better ways for pre-retirees to invest

Why RRSP investors should rebalance away from stocks
Given the rally in domestic equities as well as those from around the world, the temptation to chase returns may be perfectly understandable. But betting on rising stocks may not be the best move for all investors — particularly in the case of an RRSP.

“I know, the market keeps on going higher no matter what happens,” Toronto Star contributor Gordon Pape wrote in a recent piece, commenting on a reader’s intention to recreate stock-heavy growth portfolios in his own RRSP. “In fact, New York, London, and Toronto posted all-time record highs during [the traditionally down months of September and October].”

While Pape acknowledged that the upcoming holiday season and prospective changes to US tax legislation could lift stocks further, he cited a view that some have contested:”[S]tocks are expensive, and getting more so.”

“The whole idea of successful investing … is not buy high and hope to sell higher,” he said. “But that’s what investors who put all their money into equities are expecting these days.”

He also noted that an RRSP should be managed like a personal pension plan, which means balancing growth with asset preservation. As an example, he noted the Canada Pension Plan’s asset allocation: at the end of its 2017 fiscal year in March, it had 21.5% in fixed-income securities and 23.1% in real assets. In addition, almost 84% of its assets were invested outside Canada.

“The bond market is not doing well right now … But don’t look at fixed income as a profit centre but as insurance [against stock-market crashes],” he said. As for international diversification, he noted that many ETFs and mutual funds provide exposure to the US as well as other parts of the world. Exposure to infrastructure assets is also possible through ETFs.

“Of course there is a place for equities in an RRSP,” he said. “But stocks should not comprise the entire plan. That’s way too dangerous.”

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