All about self directed RRSP’s

A reader, who is just starting out in the finance world, wrote me an email asking me to explain self directed RRSP’s.  More specifically, here is the email:

I was wondering if you could write something about self-directed RRSPs –
what exactly they are and how to open and manage one, where we can hold
them, etc.

I thought that this would be a great opportunity to get back to basics to explain some of the fundamental concepts of personal finance in Canada.

Let’s take a look at the questions that the reader asked.

What is a self directed RRSP

To start, an RRSP is a type of account and not an investment.  So when people say “did you buy any RRSP’s this year?” what they really mean is “did you contribute to your RRSP account this year?”

There are many “types” of RRSP’s, off the top of my head:

  • You can have a mutual fund based RRSP from the bank, which can either be self directed or with a bank advisor.
  • A self directed RRSP with a discount brokerage where you can trade stocks/ETF’S and mutual funds.
  • A savings account RRSP like with PC Financial
  • An RRSP with your work place (which can/cannot be self directed)

A self directed RRSP is just that.  It’s where the account holder is responsible for the investments within the RRSP, thus the reason why it’s called “self-directed”.

Where Can You Find Them

I assume that the reader is interested in controlling her own investments.  In this case, it may be best to open a self directed RRSP account with a discount brokerage.  Which brokerage should you choose?  In my opinion, investors should be looking to reduce investment costs as much as possible. However, other factors such as investment choices offered should be weighed.

If the investor chooses to go the mutual fund route, it seems that the td e-series has the lowest cost.  If they want to stick to lower cost ETF’s or other stocks, then a low cost discount brokerage account will most likely be the most cost efficient choice.

Check out my discount brokerage comparison to see some of the features/costs of various brokers in Canada.

How to Open a Self Directed RRSP?

Simply go to the institution that you’re interested (either online or B&M) and sign up for an account.  Within the forms, you’ll need your personal information and your named beneficiary (preferably your spouse for tax reasons).  From there, you can contribute to your account up to your contribution limit for the year.

How to Manage One

Now that is the million dollar question.  First, if you’re willing to buy/sell your own investments, research is required.  However, the easiest way to get involved is to index your portfolio with ETF’s or low cost mutual funds instead of picking and choosing stocks.

Before choosing your investments however, your risk tolerance should be factored into the equation.  This will help determine your equity/bond allocation.  The higher your bond allocation, the more resistant your portfolio will be to the wild swings of the market.  This protection comes at a cost however, as it will also reduce your long term gains.

I’m not an asset allocation expert but I’ve read many times that the amount allocated to equities should be around 100 (or 110) minus your age.  So if you’re 30, then approximately 70% of your portfolio should be in diversified equities.    The key is to find that balance where you are comfortable with the volatility but without sacrificing too much in gains.

Check out my RESP Portfolio for an example of a diversified and indexed low cost mutual fund portfolio.  As well, if you are just starting out, see my recent article about how to invest small amounts per month.

If, on the other hand, you have a larger amount to invest, here’s an example of a simple low cost indexed ETF portfolio.

I realize that a lot of you are well past the novice personal finance stage, do you have anything to add?

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