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What Did You Do With Your RRSP?


A post-mortem done by the Bank of Montreal looked at the state of what Canadians do with their RRSP contributions and tax refunds after the end of the 2013 contribution deadline.  Here is what people buy with their RRSPs:

  • 49% bought mutual funds
  • 35% bought GICs
  • 18% bought bonds
  • 17% bought stocks
  • 12% bought ETFs

Someone who’s knowledgeable of their own finances and understood the concept of investing your own money properly would no doubt be shaking their head at the above statistics.  The majority of Canadians, quite honestly, don’t understand how to take care of their proper finances.  Why would I say that?  One look at the above statistics would show you that many Canadians fall prey to smart financial marketing.  People might wonder why the banks ream in billions of profits every quarter, but one only has to look at the average Canadian to see that their ignorant actions are the reasons why financial institutions do so well.  The banks aren’t robbing your pockets.  You are willingly giving them your money for free.

You might be reading this and wondering why I’m calling you an idiot.  Well let me explain the statistics above:

Mutual funds – You’ve read about how great mutual funds are as a vehicle to invest in the stock market with little risk.  No doubt your personal adviser at the bank told you that the funds you bought have outperformed the last 5 years, managed by smart investment bankers who look after your money, and they help you diversify your portfolio by holding many companies in the fund.  It’s a convincing argument, but did the adviser also tell you the fees on your mutual funds run around 3% per year, and no matter whether the manager makes money or not it gets taken away?  Did the adviser also tell you how long the mutual fund has been around for?  Did it survive the 2008 crash or did it start after when we’ve had a 5 year bull run?  Did you adviser tell you how much commission he or she made by selling you the mutual fund?  No doubt the reason why mutual funds are so popular is because the bank told you they were great to buy.  You blindly followed.  Instead of increasing your bottom line, you’re probably contributing to the banks coffers for the next quarter.

GICs – Hey I don’t like losing money as much as you do.  GICs are the perfect way to keep the capital of your investment intact while getting a little bit of interest.  Great! I guess I can lock in my money for 5 years at 2.5% and call it a day.  The ignorant investor would think they are saving and making money, but in essence you’re just bleeding your money ever so slowly.  Notice how gas and grocery bills have started to add up?  House prices keep going up? Your daily bills are ever-increasing, but your salary isn’t.  It’s called inflation.  Putting the money in the bank for 2.5% is essentially getting you zero dollars in the long run.  Add the fact that you’ll pay full taxes on your gains and you’ll probably end up losing money to inflation.  Remember that $3000 dollars you put in the bank 5 years ago?  It probably spends like $2800 after inflation and taxes strips away all your gains.

Bonds – We all trust our government to protect our money for us.  Only right now yields for bonds are near historic lows.  Bond prices have been inflated because the Federal Reserve has been buying up American bonds for a while in order to keep interest rates low.  As the economy recovers, no doubt bond prices will start to reflect that and will start to head lower.  Buying bonds only in your RRSP investment is a no brainer to losing money.  The financial adviser no doubt told you they are safe investments because you are guaranteed at least a portion of your capital, but I guarantee the adviser didn’t tell you how inflated bond prices are right now.

Stocks – We all like hitting it rich quick.  Buying stocks is sexy and it’s an awesome story to tell your co-workers at the water cooler when your stock pick goes up 10% and you made a big profit.  What you don’t tell your friends are all the picks that went nowhere, the volatility that keeps you up and night and the fact that you can’t answer the question “What was the reason you bought it?”  The average Canadian picks stocks like they pick their next shirt at Abercrombie.  It’s all about the latest fashion.  What’s the hottest stock?  What name is cool?  Most of us don’t have a clue when it comes to analysing companies so why are we buying individual stocks?

ETFs – Hey sitting at the bottom of the barrel are ETFs.  Most people reading this blog probably don’t even know what they are.  They sound like an alien name or some kind of mothership out of a Star Wars movie.  The fact is only 12% of people responded to buying ETFs.  Like mutual funds they offer the best in breed for diversification and offer much lower fees than mutual funds.  Buying a single ETF doesn’t quite cut it though, the average investor has to be diversified in everything they buy to mitigate risk.

I don’t blame you for following into the trap of the advice of financial investors at financial institutions.  They genuinely seem like nice people and the arguments for their investments are very convincing.  Before I learned anything about personal finance, I did the same thing and blindly jumped into mutual funds and bond funds that my adviser told me about.  Looking at past performance figures of old mutual funds made me think that having a professional investment banker working with my money was the way to go.  Unfortunately past performance was never indicative of future performance and many mutual funds I purchased tanked when the markets went higher.  The lesson learned was to learn it myself.

What you should be doing with your RRSPs is building a strategy,  not buying any random financial instrument that the adviser throws your way.  The financial instruments you buy should match the risk profile that is right for you.  No risk is a losing game, you’ll eventually run out of money.  Too much risk and you might lose all your money.  For the average Canadian a handful of ETFs or low cost mutual funds that diversify in everything from stocks, bonds, real estate and preferred shares is all one could possibly need to build a stead long term investment portfolio.   If you want some hints go visit Canadian Couch Potato.

If you find yourself falling into the trap of all the other average Canadians, perhaps it’s time to take up a new hobby.  Learn about your own personal finances and take control of them yourself.  In the long run, it’s much more rewarding to learn how to get ahead in life with your money rather than giving it away to the financial institutions.

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  1. wormy
    wormy March 17, 2014

    Great post! I just wanted to know your source for the RRSP breakdown percentages. Where did you get that data? I thought that you’d reference it.

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