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RSP Season 2008:

It’s that time of the year again where the blitz of advertising has begun for companies to remind you RSP contributions for the past tax year (2007) are due by March 1st, 2008. Although I for the most part write about investing into equities as a DIY investor, there are a number of people who invest strictly in mutual funds & ETF’s utilizing a DIY approach. After receiving a few emails from readers inquiring about funds and ETF’s for the current market environment, I decided that I could provide some viable alternatives for contributions that could made in the next 30 days.

The first thing that any investor who has an RSP should consider is their strategy and if anything has changed in the past 6-12 months that would alter it. Whether you’re about to enter retirement, convert your RRSP to a RRIF, make a contribution for tax savings or repaying the HBP (Home Buyers Plan) you’re individual strategy will differ greatly depending on your answers to questions such as these. It will be impossible for me to include components of strategies for everyone because I am not a financial advisor and each person’s strategy will differ slightly depending on their objectives.

The first element I would consider as an RSP contributor would be timing. No, I’m not talking about market timing, but instead talking about when you contribute to your RSP each year. While some individuals contribute weekly, monthly or yearly depending on available savings, the thing to remember here is the how compound interest can work to your advantage over a long period of time. When you consider that a contribution for 2007 could have been made in full on March 2nd, 2007 instead of over the next few weeks, an investor would have gained an advantage due to the compounding nature of investments having invested those funds earlier in the year. Investing throughout the year may also benefit an investor through dollar cost averaging (DCA) as they contribute during both the ups & downs of the market over time. This often helps to take out the anxiety many investors have during market dips when they’re unsure of when to buy with cash on hand. If your investing strategy is sound then over the long-term those dips will equal to greater opportunities to purchase investments at lower prices and a DCA approach helps to eliminate the mistakes often made in market timing.

With the emergence in the past few years of low cost investment options such as index funds and ETF’s many investors are now focused on the cost of their investments and fees paid to mutual fund companies for the performance they receive. I’ve written about this before, but over a long period of time fees can eat into returns and my belief has always been that there is a balance you should pay for the performance of your investments when invested by someone else.

Instead of buying high-fee mutual funds from a mutual fund company, you may instead choose to buy active management yourself. The majority of investors do not have the desire or time to invest their own money and are willing (or naive) enough to pay the high fees without worrying about their impact on returns. Most of these financial institutions continue to grow assets under management, earnings, dividends and yields at this time are well above returns of GoC bonds & GIC’s which many investors hold within their RSP’s anyways.

If you’re an investor who only recently has decided to utilize a DIY approach, then there are a variety of products that off cost-efficient access to indexes and markets around the world. Using the couch potato portfolio or a diversified portfolio of low-fee mutual funds may be a great start for an investor who feels they still need to learn, read and prepare for greater participation in managing their finances.

Should you invest into US equities at this time? No one can know for sure, but many companies south of the border which have multinational operations and attractive dividend yields might be an option if you’re looking to gain exposure to non-Canadian investments while investing in financially stable corporations. Companies such as JNJ, GE, PG, CL, KO & MCD have excellent exposure to non-US markets and their dividends are 100% tax free if held within your RSP due to the non-withholding tax.

Finally, if you’re sitting at home watching, listening and dwelling over the media attention to the economic environment and dire outlook on the economy, there is nothing wrong with making an RSP contribution into a money-market fund and re-evaluating your options in a few months time. You won’t make much on these investments, but if capital preservation is your foremost goal then you likely can’t go wrong over the short-term with this option. There are also no-load, lower fee mutual funds which have performed relatively well in down markets such as TD Monthly Income. With an MER of only 1.41% this fund invests in a 60/40 split between Canadian equities and high quality bonds and has never had a negative performing 12-month period in its existence. The fund has also handily beaten its respective benchmark and category over a long period of time which is something I look for when evaluating any mutual fund. It is also an excellent candidate for your RSP since the monthly distributions are protected from taxes within the RSP and add to the compounding nature of your investment due to the distribution of re-invested units.

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