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. 


  1. George on February 7, 2008 at 9:50 am

    One thing I’ll add here: don’t open multiple RRSP accounts unless you have a good reason for doing so. It just increases the need to juggle multiple accounts, and increases your costs. Stick with a single RRSP account that suits your needs.

    Many people have the misconception that they need to “buy” an RRSP every February, which isn’t the case and makes no sense (except to the financial industry). An RRSP is nothing more than a “shell” that can hold any number of investment products. You only need to have a single RRSP account, and you can add investments to it on a regular basis (personally, I think everybody who has an RRSP should contribute a little bit every time they get paid – it’s far easier to do that than to come up with a lump sum in February.

    FrugalTrader: At what point would you recommend switching from a bank-based mutual fund account to a discount brokerage account? Effectively, at what portfolio size are the trading costs for ETFs less than the MERs of index funds?

  2. Deborah on February 7, 2008 at 9:59 am

    All evidence is that not only are we entering a recession, but we are entering a world recession.

    In general, stocks decline on average 28% during a recession. I suspect the magnitude of the financial instabilities in the world right now means that this recession will probably be stronger, probably the strongest one the world has seen since the depression. You have serious slow downs being experienced in Canada, the US, Europe, India, China, indeed, the number of times I am researching something else and I hit a news story about how an industry or economy is slowing down is beyond staggering.

    In this kind of market cash and cash kinds of investments are king. Put your money in guaranteed investment certificates that are government guaranteed.

  3. George on February 7, 2008 at 10:03 am

    Deborah: It really depends on your time horizon. Sure, it’s possible to have a world recession and stocks might drop significantly, but over the next 5, 10, 20 years, the stocks will recover significantly. The best opportunities for growth occur during the recovery period.

    My retirement is still 20+ years away, so I’m fairly confident that I won’t have to worry too much about eating cat food if my RRSP drops in value in the next few years. That said, I’ve also got a good safety cushion since I also have a good pension plan.

  4. Tim on February 7, 2008 at 11:21 am

    Great article. For picking the right index funds take a look at http://www.moneysense.ca and read about their Couch Potato strategy. Depending on age etc it basically suggests splitting your index funds between bonds, US equity index, CDN equity index and International equity index and re-balancing once a year.

    They also recommend the TD e-series funds.

  5. MikeG on February 7, 2008 at 12:19 pm

    Okay time for mini-rant.. I am sick of hearing people say “If you have a long timeframe, buy at any price! The stock market goes up over long time periods”…

    Lets see how people feel who bought into the S&P500 on or about Sept. 1st 2000. I will be using finance.google.com for my data and IVV (ishares s&p500 etf) as a representative of the S&P500..

    September 01, 2000 IVV == 152.29 <— Lets say we bought in here.. yay top of the market!
    Feb 23 2003, IVV == 84.97 + 3.42 in dividends. Total return (-41%) over 2.5 yrs.
    Lets say you had 3% GICs for the same period (we’ll say 2.5 yrs for easy math) (152.29 * 1.03^2.5) We’d have $163.97. This means you’d have about 85% more money by choosing GICs (or other fixed rate interest bearing equivalents from a lender that doesnt default over the period).
    Lets expand our timeline some more. The next “Peak” of the market, Oct 12, 2007, IVV == 156.14 + 13.65 in dividends. Total Return 11.5% over about 7 yrs. Lets compare to GICs again @ 3% .. We’d have $187.30 or 23% over 7 years (twice the performance of stocks).

    The Moral of all this math? You do well to get out of stocks/funds during recessions. Buy back your favorites (ie the best values!!) at the bottom. We don’t have crystal balls, but we do have indicators like P/E ratios (don’t pay too much for earnings!!), economic reports et al. Also for those who don’t want to test the ratios, you can do things like “doubling down”– Buy more in the lows/lulls, say for every 5-10 pts that IVV goes down, buy twice as much shares.. I.E. say you normally put 50 a month into the shares, but this past month its gone down 10 points, put 100 in and if its gone down 20 points put 200 in, etc. etc. all the way to the bottom. This gives you very low average purchase price over recessionary periods (as long as you dont run out of investment money before you hit the bottom!).

    Anyways long comment, ill leave it at that.

  6. Karl on February 7, 2008 at 12:42 pm

    Mike, I believe your example is a bit flawed.

    First of all, long time frames are > 10 years. Your example only covers 7 years, which is still short term. A lot of people are looking at > 20 years until retirement which gives a lot of time for money to grow.

    Secondly, you are not taking into account regular contributions. I’m sure if you looked at making monthly contributions, the IVV would become a much more profitable venture than the GIC. You are looking at making one investment at a peak, which skews all the results and is an unreasonable assumption. If you made your buy date Oct. 4th, 2002, then you would end up with a 60% return (which kicks the snot out of the GIC return), but this is all with 20/20 hindsight. At the time, it would be very difficult to predict. A real example should take into account regular contributions.

    You do, however, make a good point about lower prices. As prices go down, buying should become even more attractive, as you can think of it like an ETF sale!

  7. nobleea on February 7, 2008 at 12:43 pm


    You’re contradicting yourself. You suggest to get out of stocks/funds during recessions but then suggest averaging down aggressively with any drop.

    The best returns are typically right after a recession or big drop. Waiting until the market is trending up might lower the volatility in your portfolio, but it will also lower your returns. Hindsight is always 20/20 and it’s easy to say now that GIC’s would have performed better over that 7yr time period. Your suggestion to sell during recessions means you pretty much have to know when the top is.

    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.

    Stocks have always performed the best, given a decent period of time (say 20 years). There are only a handful of people in the world who can continually and successfully time the markets.

    Looking primarily at P/E ratios for a company is a good idea, but is unrelated to recessions. Warren Buffet has been buying quality, low priced companies and holding them for decades.

  8. George on February 7, 2008 at 12:46 pm

    MikeG: I think you’ve mis-characterized my comment. Sure, if people buy in right at the peak, they’ll certainly lose money and be better off putting their money into something with a guaranteed return.

    What you’re advocating, though, is market timing. We don’t know when stocks will go up or down, and we don’t know when we’ve hit a “peak” or a “bottom” until several months afterward. Market timing certainly can maximize returns, but it requires a good deal of luck and the acumen to watch the market closely.

    I’ve invested my cash in a couch potato portfolio, and I don’t plan on selling just because there are people spreading FUD. I’ll keep my asset allocation where I think it should be, and stay invested for the long haul. This strategy pays off over long time periods. It also has a very low PITA factor.

  9. nobleea on February 7, 2008 at 12:48 pm

    As for the topic above, I agree that starting out with banks is a good idea. Once a fund portfolio reaches the 15K mark, it might be time to switch to a brokerage as long as you are comfortable with making buys directly on the stock market. Banks are convenient when starting out.

  10. FourPillars on February 7, 2008 at 1:23 pm

    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.


  11. Nate on February 7, 2008 at 1:28 pm

    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.


  12. David on February 7, 2008 at 1:29 pm

    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. Fabulously Broke on February 7, 2008 at 2:15 pm

    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.

  14. George on February 7, 2008 at 3:35 pm

    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.

  15. MikeG on February 7, 2008 at 9:34 pm

    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.

  16. CheapCanuck on February 9, 2008 at 8:43 pm

    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.

  17. MikeG on February 11, 2008 at 12:32 pm

    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.

  18. Deborah on February 12, 2008 at 12:50 am

    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.

  19. George on February 12, 2008 at 1:48 am

    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.

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