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Rethinking My RSP Strategy…

At twenty-six many individuals are just beginning to consider an investing strategy or developing a financial plan in order to contribute and organize their registered savings plan. It seems that many people have a variety of reasons for investing in an RSP, when they contribute or how they invest within it.

A lot of people ask me why there’s such a buzz around contributing to your RSP and if it’s even worth it. There are pros & cons depending on your personal situation, so I’m not able to give a definitive yes or no answer whether investing into an RSP makes sense. The simple fact is that an RSP allows you to grow your savings until retirement tax free and offers preferential tax treatment if you’re in a high tax bracket. Speaking with a professional about your own unique situation or researching those questions on your own are the best options if you have concerns about whether an RSP plan is right for you.

Remember that the banks and financial institutions want you to have RSP’s and invest regularly because it puts more money into their pockets with the fees and expenses they charge you to invest into different investment vehicles. That’s not a knock against the industry, there are lots of people out there who have no ambition to control their own financial fate and would rather put that into the hands of who they deem to be experts regardless of cost. But you should be contributing for the RIGHT reasons and never the WRONG reasons. Your actions should make sense for your personal situation and not simply because your banker, friend or financial planner told you to do it. For me, as with any investing activity, it’s important to focus on making money work for you and looking to take advantage of those situations.

I originally took advantage of RSP contributions when during my second undergraduate degree. I used it to help drop my yearly income down a full tax bracket and combined those savings with my claimed tuition & student expenses. I haven’t contributed to my RSP in the past two years because of my pension adjustment at my current employer and the absent tax advantage for contributing in my current tax bracket. My personal feelings are that growing the contribution room for future years when I’ll be making more money and in a higher tax bracket will benefit me more than contributing today. For my situation I have little desire to hold a massive RSP portfolio, along with a healthy pension, only to be forced to withdraw a higher percentage of those funds from a RRIF later on in life; that obviously defeats the purpose of an RSP. If you were an individual with no pension, then the benefits of an RSP strategy clearly weights contributing in your favour or if your spouse has no pension then contributing solely into their name is a valid strategy.

When I started balancing my RSP & Non Registered accounts I chose a 50/50 split, which has changed considerably to date. After first accumulating $20,000 in my RSP and having little preferential tax treatment at this time, I began accumulating as much as I could in Non Registered savings. Out of those savings the Health, Value & now Dividend Growth portfolios were formed. But now I’m at a cross roads with a decision to make.

There’s not much incentive at this time for adding more to my RSP from either a HBP (Home Buyers Plan) or preferential tax treatment standpoint. Each of the three main portfolios where started with $20K each with the intention for them to grow organically over a period of time. When I buy a home my goal will be to become 70% mortgage free before I start injecting more savings into the DivG portfolio. The plan at this moment is that once the Value & Health reach a certain size through compounding returns, I’ll milk the returns off the portfolios and inject those gains into the DivG. The reason for this is simple – in Canada there is a huge incentive through the Dividend Tax Credit to hold Canadian dividend paying stocks outside an RSP. This should allow me to reach a semi-retirement goal well before my 50th birthday and will grant me some level of financial freedom at that time. I can continue to work if I choose to or spend more time with family, travelling or any other activity that’s a priority in my life (more time at the cottage?).

So with my RSP set for the HBP and my other three portfolios self sufficient for the time being, I’m stuck accumulating cash. I could simply put a sizeable amount into savings with the intent to purchase a home, but that’s not likely to happen for 2-3 years due to the outrageous pricing environment of the housing market.

The clearest choice at the moment is to inject more cash into the DivG portfolio in order to accelerate my pre-retirement goal or create a tax-efficient income stream sufficient enough to pay off a mortgage. But I’ve been wondering lately if there’s another, more attractive alternative that I could be considering due to the current economic environment everyone seems so pre-occupied with. Is there possibly a strategy for investing that aligns itself somewhat with my own core competencies (doing what I do best)?

Chuck (my mentor) had an idea that took me a while to figure out. Since I already have an abundance of knowledge of value and applying that to different investing techniques, Chuck suggested that I strongly consider taking advantage of the current environment to re-examine my RSP strategy. Up until now, I’ve mainly kept the portfolio in high quality mutual funds and TD e-funds with exclusive exposure to bonds, US & international investments. I’ve always had the intention that at some point I would re-organize the RSP portfolio into individual bonds & US/International stocks – likely after paying back the HBP requirements. Yet with the current volatility of the market, valuation of currencies and required management of the existing three main portfolios I hadn’t given it much thought.

There are a few conditions that are beginning to form that I feel offer a young investor with the proper discipline one of those “once in a lifetime opportunities” to take advantage of. You have to go back to 1974 (Watergate, UCLA’s 88-game win streak, Gillette’s first plastic razor) to be in the presence of a Canadian dollar at the same valuation or higher than the USD. A lot happens over thirty years and I’m not suggesting that the next thirty will look anything like the past, but it’s important to keep in mind that for a long-term investor there are opportunities that come along very infrequently that allow you to take advantage of certain conditions. There is lots of talk in the media, online and from professionals that “fundamentals rule the global economy”, “the American consumer remains robust”, “the current presidential cycle eliminates risk” or “China won’t be in any trouble until after the 2008 Olympics”. The simple reality is that we’re in waters uncharted for the past 30 years. We went from computers the size of rooms to devices such as the blackberry that allow you to communicate almost anywhere in the world in real-time. The world has changed, the pace has changed…nothing will be the same. Possibly similar, but never the same.

Now I won’t speculate on where I think the CDN$ will go…I was never one for those boring economics classes about supply vs. demand. I understand the basics, but I’ll leave the speculating to those who feel they actually have a grasp of the future and what might happen when we get there (right). For me, the situation is becoming cloudy enough that one option is getting crystal clear…

We are an exporting economy – plain & simple. Corporations can adjust to an appreciating dollar in relationship to a weakening USD, but only for so long. We export close to 70% to our largest trading partner – the US. So even though our dollar has stayed relatively neutral to other global currencies over the past few years, the fact the US is clearly our largest customer for both products & services speaks volumes. No one can accurately predict with absolute certainty where we’ll be in another 10-15 years, but at this moment we are vulnerable to whatever goes on below us. Asia and the rest of the world, amounting to only 30% of our consumer base, doesn’t have the purchasing influence to keep our heads above water if the US consumer decides to stop spending.

Don’t kid yourself – our politicians are already contemplating the “what ifs”. There are people in positions of power who fund enough of political campaigns to make sure their concerns are addressed. We’re not simply talking about income trusts or one party’s choices over another; power can be fragile with any minority government and the last thing anyone in power wants to concede is that the economy is tanking on their watch. If there’s a monumental collapse of the USD, we won’t have to worry too much about anything – because we’re all in for one hell of a ride. China sells to the US consumer & everyone else is selling to China. They might appear independent, but they are VERY dependent. So this leaves people very aware that we may be approaching a point where individual interests will take precedence over the needs of neighbours, business partners or the broader global economy. The US has a very narrow scope of focus outside their borders to begin with, so I doubt they’re about to start worrying about how their actions affect the rest of the world.

What that means to me is that the dollar is likely to remain in the range it’s currently been in for the foreseeable future. I don’t know where it will stabilize, increase or decrease from…I just know there’s value in the currency exchange from the view of a long-term investor looking to invest in US securities. This range might not change for years or months, but provide enough time to take advantage of what I’m seeing as a golden opportunity. What I’m assessing specifically is the purchasing power this situation presents with a 30-year time horizon. There are many multinational US corporations who may suffer in the short-term due to the current economic environment and provide significant value or substantial dividend growth for an RSP strategy.

The stocks specifically I’ve only just begun to target & research, but I’ve already been slowly converting some cash into USD in anticipation that I’ll DCA another 10% each month or two in order to take advantage of the dollars current rise.

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{ 5 comments… add one }
  • Middle Class Millionaire September 24, 2007, 9:10 am

    Great Post!

    I’ve been making the same argument for a while now. Only time will tell though how long it takes the high dollar to affect our exports. But as you implied it’ll only be a matter of time with 70% of our exports dependand on the US.Another factor that I feel could be important is peace in the middle east. If there was no conflict in that region why would we ring it out of the sand in Canada for $85 a barrel when we could simply pump it out of the ground over there?

    Which US stocks are currently on your radar?

  • MG September 24, 2007, 5:29 pm

    Good post.

    I have often said that I believe we are close to a ‘perfect storm’ right now for USD weakness v. $CAD.

    – Strong Canadian Economy
    – High Oil Prices
    – High Mineral and metal prices
    – U.S. crisis situation in housing and credit.

    Will all of these factors continue to be true?…I think the answer is a resouncing NO. I agree with you that it is too hard to predict, but seeing where we’ve come from it seems pretty likely that we could either return there or halfway back ~$0.80 quite easily over the long term for Canada to feel better economically and resume the equilibrium that it might be forced to maintain because of economic forces within and outside of our great nation.

  • Nurse B, 911 September 24, 2007, 7:52 pm

    MCM,

    At the moment the short list consists of AXP, BAC, C, CL, GE, JNJ, KO, MMM, PG, WB, & WAG. I’ll also gladly take other suggestions for analysis since both you & MG have holdings & experience investing in this category of US names.

    But since I haven’t ever really looked at any from a value perspective (aside from my health holdings in CL/GE/JNJ/MMM) I’m starting from scratch with a different set of rules/discipline, so I’m having to throw out my bias and start fresh with a different view.

    Oil is a tougher one because sometimes I think that the middle east is just a ticking timebomb and the whole region may get sucked into turmoil over the US conflict with a whole range of issues there. The only reason there’s so much investment in the oil sands at any price deals with security of supply & future reserves – plain & simple IMO.

    MG,

    I definitely don’t want to speculate where it might go at any time, just that by taking advantage of the current valuation of the CDN$ I’m at least covering some opportunity that might not be there tomorrow or in the future. This RSP strategy clearly isn’t going to be on the scale of the other 3 main portfolios, but 5-7 names is the target for now and we’ll see where the valuation of the loonie goes in the future & what economic picture develops in the US heading into 2008. I don’t see any golilocks since I brought up the point that she WAS kicked out of the house of those 3 bears

  • Middle Class Millionaire September 25, 2007, 3:15 pm

    You might want to add these to your list:

    HD
    FDX
    WMT

    (I’d be interested to hear your thoughts on them also.)

  • Nurse B, 911 September 25, 2007, 7:28 pm

    Thanks for your suggestions on WMT, HD & FDX. I know more about WMT from an operations standpoint…but I think I might have trouble coming to an appropriate growth # for them for future earnings, thoughts?

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