Just Starting out with RRSP’s

With RRSP season underway, I've been getting a bunch of e-mail from readers asking "what is the best way to start an RRSP".  I figure instead of emailing the exact same answer to everyone, I'll take the most efficient route and post it for everyone to see.

Providing that an RRSP is for you, there are different answers for different situations.  If you're just starting out, chances are you'll want to put small amounts into your RRSP on a monthly basis.  In this case, I would recommend against opening a discount brokerage account, but recommend going with a bank sponsored RRSP mutual fund product instead.  Here's why..

Bank sponsored mutual fund products usually provide:

  • A decent selection of index based mutual funds where index funds charge lower MERs.
  • No commission to buy/sell (discount brokerages would charge a commission)
  • The ability to buy partial shares from the small monthly deposit (discount brokerages cannot purchase partial shares)
  • No annual fees (some discount brokerages require a min balance before waiving their fees)

Out of all the bank based index mutual funds, the one that I recommend the most is the TD e-Series Funds (not affiliated).  With their MER's comparable to Canadian based ETF's (0.30%-0.50%), they are the cheapest index funds available to small investors.  The only catch is that you need to purchase the funds online yourself without the help of an advisor which is how they keep the costs low.

As a young investor, you're probably thinking (as I often do), "I can beat those 8% equity returns by picking my own stocks…" 

It is possible to beat the market on your own, but it takes research, a lot of work, and a healthy dose of luck.  If you don't have the time and/or inclination to do such research, then it's best to stick with index based investing.  It is even possible to pick mutual fund managers to do the buying for you, however, statistics show that 75% of mutual fund managers do not even beat the index after their fees.

In conclusion, if you fall under the scenario of someone just starting their RRSP with small amounts to deposit in a monthly basis, then a bank sponsored mutual fund RRSP account may be a solution for you. 

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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13 years ago

MikeG: Nobody is arguing that the stock market only goes up, but history has shown that over any long enough period of time (usually 10+ years), stocks have the highest returns among asset classes. Over shorter periods of time, it’s quite possible for markets to take a dive. That said, I don’t think it’s a good idea for anybody to have all of their cash sitting in stocks – a 66/34 split is what I have right now, and it’s cushioned my RRSP from the recent market volatility quite a bit.

13 years ago

You can’t time the market, but that there are serious economic concerns out there right now, very serious ones. You can’t time the “best” time to get in or out, but there are times that there is a high probability that it is a bad time to enter, like now.

There is potentially another trillion in losses in the financial sectors to be worked out, debt is being grossly repriced, which is squeezing margins. Stocks are currently priced as if the gross reversal from the mean can continue forever.

Take a look at the cost of borrowing for companies dramatically increasing, commodity price inputs dramatically increasing and profits are going to go through the floor, along with it your capita.

13 years ago

Well, here’s some general ideas that help with the idea that help indicate its unlikely the markets would go up for 10 yrs straight.

Stocks represent ownership in a company. The value of a stock has a direct correlation with the current value of a company, market sentiment about where that company is going (economics and personal opinions play here), influx of investment dollars (imagine if 4 billion people decided to put $50 a month into stocks, we’d all be out bidding ea. other for precious few available shares) and im sure other factors that im not considering.

When a stock reaches a certain price, its no longer a good deal, you can find better ways to earn money, whether its GIC/Bonds, or investing the capital into something you do yourself. Imagine that the lowest P/E multiplier in the entire market is 40x and the economic outlook says its unlikely that any business is going to make more money in the next 3-4 years.. then (given 100% distribution of earnings as dividends) it would take 40years for you to get your money back, let alone have a return. People would start to look to alternative investments or ways to generate a “value” in their life. Maybe they’re better off paying down a mortgage or getting more schooling, or taking time off to enjoy life.

to help keep this shorter (because i should be working right now). You can use things like this to help you make an opinion if the market will be going up in the near future. As situations change your opinion should too change to reflect the current times.

Also as a somewhat side comment, to say “The market has always gone up in the past, therefore it must go up in the future.” Is like saying “I’ve only ever seen mice with tails, therefore all mice have tails” … there’s no guarantee that the market will always go up. If one day scarcity of resources was solved (ie a cure for death, or we find a huge cache of all the needed resources, interplanetary colonization etc..) then there’d be an abundance of available resources and capital etc, meaning people wouldnt be rewarded for providing it (investing it)..

I know its far from scientific, but it makes sense to me.

13 years ago

All good points, but this is still market timing. How do you know the equity markets are not going to go straight up for the next 10 years while you are sitting on the sidelines waiting for the next drop? And, when that drop inevitably comes, it would still not likely drop down to as cheap as it is right now.

13 years ago

Okay, Im back…

Maybe I can clarify my point. What I was getting at is that blindly throwing money at the market (IMHO) is bad strategy. What I was trying to get at is that the money that was contributed into a “monthly” plan on sept. 2000 will see very little return in the 7.5ish year period after it was invested (maybe more, depends on where we go in the next 5 yrs).. People could tell the market was expensive by watching the P/E ratio of the stocks they were purchasing. (Jim Cramer knew to get out). The S&P had approximately a 40x P/E. that is expensive to me.. I dont want to pay 40x earnings when historically the average is about 15-16… That to me doesnt look like a sale, but more like Valentines day…

I said we should buy as stock goes down because no one (that i know of) has a crystal ball to tell them “yup, recession this year” or what have you. But we do have a good understanding of how much we’re paying for the Stock.. P/E, P/B, Dividend yields etc, help us understand if we’re paying a high or low price. Buying at lower prices (assuming the same earnings) is a good way to help lower your average price/earning ratio. Also like someone mentioned Dividend yields go up as price paid goes down (assuming they are still paid as in the past.)

This is the opinion I hold.

13 years ago

David: a currency-neutral fund is hedged so that the currency fluctuations don’t impact the fund’s returns. If you invest in a currency-neutral fund that invests in the S&P500 (for example), then your returns will be those of the S&P500, less the MER. If it’s a regular (not currency-neutral) fund, then your returns will be increased or decreased depending on currency fluctuations between CAD and USD.

Fabulously Broke
13 years ago

I go with TD E-Series as well.

I’m a huge fan of the index funds there, esp the U.S. Index, and the Tech fund with Apple *heart*

David: Your assumptions are correct from what I understand..

For Currency neutral it just hedges the money so that if the USD or the CAD takes a nosedive, your money is protected by not nosediving *as far down* as what it would’ve normally been, if the funds were in CAD or USD specifically.

13 years ago

Not to stop this war about when to buy and what to buy. I looked at the TD site and noticed a few currency neutral funds. Does anyone have a good explaination for how these work?

If I figure the US dollar will be down over the next ten years, but I still want to invest in the DOW (for example) would a currency neutral fund try to minimize the losses that would happen with the currency drop?

13 years ago

Does anyone have an opinion on the new ING streetwise fund?

I already have most of my RRSP’s with ING (just in the investment savings account right now). So I was thinking of dumping them into the new Streetwise fund that they’ve started. It doesn’t seem as cheap as the TD E-funds, but I already have a lot of savings with them and it’s all tied into my primary bank account for easy transfer.


13 years ago

If you’re a dividend investor, like many here, they would salivate at the thought of drops in share prices as they can buy more of the same high quality company for cheaper and greatly increase their future dividend income.

This applies to any type of investing not just dividend stocks. If you are in the accumulation phase then good returns are not what you want.