The Globe and Mail, Report on Business
Published February 21, 2009

As regular readers know, some of my best columns are written for the sole purpose of keeping peace at home. If Lori wants me to write about something, the best way to get her off the warpath is to do it. When I lamented about not having a topic for this week, she didn't hesitate. “You don't always have to write about some obscure part of the business. Do something on what people are thinking about – the RRSP season.”

Wisely, I decided to give it a try, although you should be warned that self-help articles are not my thing. Also be warned that the tips are aimed at changing the way people approach investing.

Stop looking backward

As I wrote in December, we need to pull ourselves out of the gloom and dispassionately evaluate the opportunities that are available to us. What matters now is how prospective the current environment is for building wealth over the next few years. By definition, future returns start today.

We now find ourselves in a situation where safety is expensive and risk is cheap. Secure investments such as government bonds provide minimal return and are vulnerable to any pickup in inflation. It is conceivable that a holder of a Government of Canada bond yielding less than 3 per cent could lose money for a number of years to come. Risky assets such as corporate bonds and stocks, on the other hand, now have healthy yields and are priced to generate double-digit returns over the next three to five years.

Behaviour change: Safe and predictable investments were a great place to be over the past year. Going forward, limit your holdings in government bonds, GICs and bear-resistant products to the minimum required by your personal situation.

Go up with more than you went down with

I learned this rule from Bob Hager, who was the master of keeping it simple. Unfortunately, the majority of Canadian investors will pay little heed to Bob's advice.

A recent report from Earl Bederman at Investor Economics shows that at the end of last year equities accounted for 35 per cent of the average Canadian's financial assets. That is well down from 2006 and 2007 when it was around 45 per cent. We have to go back to the beginning of 2003, which is when the last market surge began, to see that low a number.

Behaviour change: Don't try to be exact in timing the bottom. Recognize that the balance between reward and risk has shifted in your favour and your portfolio needs to reflect that. RRSP contributions should be used to move the equity weighting back to where it was a year or two ago.

Look at what you own first

Too often when we meet with prospective clients, we find portfolios littered with small positions in numerous mutual funds. We recently reviewed the accounts of a family that owned 36 unique funds.

Investors find themselves in this situation as a result of buying each RRSP season's latest and greatest. We can usually glance at a portfolio and accurately predict when each fund was purchased. The tech fund was 1998 or 1999. The energy fund probably came in 2006. And the principal-protected note was likely 2007.

Behaviour change: Before succumbing to new hope, look at what you already own. Everything is down, but if the reason for buying a security still exists, then consider investing more. If a fund is still run by the portfolio manager you liked last year, then add to it. If your thesis on a stock hasn't fundamentally changed, despite the recession, then perhaps it's worthy of further investment.

Don't move until you get better answers

The research I've seen suggests that an increasing number of investors want a change of scenery. They are looking for a new adviser and/or manager. We're hearing phrases like, “It's time to take control” and “I've got to pay more attention.” Some of the changes will be justified, but many will be strictly the result of ugly markets and a burning desire to do something.

Behaviour change: If you are going to be one of those bodies in motion, make sure the place you're going represents a serious uptick. You don't want more of the same. So in the interview, don't cut them any slack. Ask the questions you've been asking (or should be asking) your current provider.

“Will I know what I own and how I'm doing? What will it cost? How are you compensated? Will I talk to you or your assistant? How did you deal with your clients during 2008? The portfolio you're recommending today would have done well last year, but how will it do when the market recovers?”

Don't do what everyone else is doing

Too many regular RRSP contributors are going to give it a pass this year. Money is harder to come by and there doesn't appear to be any imperative to act right now. The markets continue to go down.

Behaviour change: If you're going to miss an RRSP season (which I don't recommend), do it when times are good and the money is pouring in – in years like 2000 and 2007. Don't skip the one that everybody else is missing.