RRSP season has changed

The deadline for RRSP contributions that are deductible on your 2011 tax return is Wednesday. However, you would hardly know it from the lack of advertising and hype this year.

In the old days, investment advisers would hunker down in February like accountants in April; banks would have extended hours and every free advertising space in every newspaper and on every TV channel would be clogged with claims of a "better RRSP" than the competition.

When the stock market was booming, it was easy to get people excited about the deadline for RRSP contributions. These memories seem almost quaint now.

In the last year or two, I have heard countless people say the bad markets of the last five years have discouraged them from investing at all.

I believe for most people, this is a mistake.

The argument below is not meant to "sell" you on investing in the stock market, mutual funds or any other particular investment product. What I want you to try to do is slay the right dragon, not kill the messenger, avoid throwing out the baby with the bathwater and, above all, make sure that any changes to your previous retirement tactics are going to bring you closer to your goals, not take you further away.

It can be smart to change tactics when your tactics are not working. It's an unhealthy mind that continues to do the same thing over and over again expecting a different outcome.

Having said that, think about the ancient parable of the snowblower and the lawnmower. One March long ago, an old sage looked in his garden shed at his neglected lawnmower, which had not turned a blade since the previous September.

"That's a useless piece of machinery," he said, as he hauled it out to the curb for the trash man. "Obviously, I need to buy a snowblower."

Human nature says you do what is rewarding to you. In investing, that means you are more likely to purchase investments that have recently performed well. Ironically, that's often near a market top and just before a market reversal.

With the lawnmower, it's easy to see the folly of that thinking, but it's analogous to the way many people invest, selling or avoiding investments that have performed poorly and buying ones that have recently performed well.

This is also folly if those are investments that regularly go through cycles. (On the other hand, there are some lousy, poorly managed and overpriced investments out there, which you are wise to avoid in any season.)

Your long-term investments and RRSP contributions are generally aimed at building up enough capital with which to retire. The retirement variables are the following:

1. rate of return

2. amount of present capital

3. amount of regular investments over time

4. date of retirement

5. sustainable withdrawal rate after retirement.

If your rate of return is lower than you had assumed, then you must invest more, delay retirement or both. The solution is not to invest less, which simply exacerbates the problem.

Options such as aggressively paying down debt, purchasing rental properties or starting a business are all valid, though all have potential risks and complications.

Again, think baby and bathwater.

Moving from mutual funds to ETF investments is worth examining if the mutual funds you own are underperforming the market consistently. This means they are not earning back their management fees. However, if your dissatisfaction is with the market returns rather than your funds, switching to ETFs is not a solution.

If you have too much exposure to stocks, then adding bonds and GICs may be the right prescription for you. On the other hand, if you have been too conservative and have too much fixed income, you may want to cautiously move back into equities. Do the right thing for you.

Here's my real point: Do what you can to improve your tactics and tools, educate yourself about the investment alternatives and demand value from your adviser and your investment products.

But even if you are dissatisfied with them, don't let that stop you from implementing the savings program you need to reach your retirement goals.

David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).

dchristianson@wellwest.ca

Republished from the Winnipeg Free Press print edition February 24, 2012 B10