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Mistake to avoid during RRSP season

Posted by admin on February 2, 2010 in Investment Information

If I was to pinpoint a time of the year when I made most of my investing mistakes, I would pick the January- February period when I contributed or topped up my contribution to my RRSPs. The mistake is not so much contributing to my RRSP (and although research does indicate TFSA may be more tax efficient than RRSP, do not turn the TFSA/RRSP issue into an either or debate. Contribute to both). My mistakes happened in the 24-48 hours immediately after the contribution or contributions (see #1, #2 and #4 below).

Besides not contributing, 5 common mistakes made during the RRSP season include:

1. A rush to buy. This is the equivalent of your Mother telling you not to spend all your allowance on the first day. It is perfectly acceptable to contribute and to invest your RRSP contribution to a money market fund until you figure out (i) what exactly is your investing strategy? (ii) what am I buying to execute this strategy? If you don’t have an over-arching plan in mind, you end up with multiple holdings (often with over-lap) with no rhythm or reason between them. The key is find an accurate solution and not an expedient one.
2. Being fully invested. Fully invested in plain English for you have no cash on hand or, to continue, the analogy, you spent all your allowance.  This is problematic in accounts where your contribution is capped like an RRSP. The largest reason being you have no flexibility, you cannot take advantage of bargains and you cannot reallocate your allocation properly. The temptation is to take 100% of your RRSP contribution and to use all of it: a bad outcome if you have a plan, a terrible outcome if you do not. Your allocation of cash will depend on your risk tolerance. I tend to peg mine at 10-15% of my portfolio.
3. Trying to get advice during this time. Your investment advisor is probably working 10-14 hour days for most of February. It is going to be hard to garner first rate advice from them during this time. Yet, strangely, everyone calls their investment advisor during this time expecting first rate advice. The better alternative is to have your strategy in place before the rush and buy according to the strategy. In this manner, the decisions tend to fall into place easily.
4. Buying yesterday’s champion. If you actually do happen to reach your advisor, they may try to sell you yesterday’s champion which is, statistically speaking, often tomorrow’s loser. But if you combine #1 and #3, the temptation is to look only at the performance numbers for the last year (2009 being an investing exception rather than the rule) and invest in that because you believe you need to make your RRSP investing decisions now with your entire contribution.
5. Avoid the new products. Investment products are like new cars. Every time a car maker introduces a new generation of a vehicle, the general advice is to avoid the first model year so that they can work all the problems out. In other words, let other people be the guinea pig. As Canadian Capitalist posted recently, the newest kids on the block, niche ETFs, probably are not ideal for most portfolios.

The best way to avoid these mistakes are to approach RRSP season like a project. What exactly is your plan? How are you going to achieve this plan? If you do not have time to think of a plan, then contribute to your RRSP and leave it in cash or a money market fund. Put together a plan later. In other words, try to approach RRSP season as a process which extends past this year’s deadline of March 1 rather than a mad dash to the finish.  As a business colleague once told me the only thing that happens quickly in life is losing money. Good luck.