RRSP Investing Mistakes To Avoid
(NC)-So, you´re ready to step up contributions to your Registered Retirement Savings Plan (RRSP). You are eager for the tax and compounding growth benefits. You think you are on your way to a blissful, carefree retirement, right? Maybe. But if you don´t take the time to learn about this type of investment, you can make mistakes, cost yourself money and slow down your ability to build wealth.
Joanna Saar, a Mississauga, Ontario-based financial adviser with CIBC Imperial Service and certified financial planner (CFP), sites some of the most common mistakes people can make when investing in RRSPs.
Parking your money in money markets. When markets are volatile, investors often flock to the perceived security of short-term investments. People often "park" their capital in a safe low yielding investment such as money market funds until the markets settle down. But too often, they wait too long. "This is your hard-earned after-tax income," explains Saar. "You have earmarked it for retirement so why not get it working for you? By investing in money markets, you forego the potential returns that a well-developed investment plan and diversified portfolio can help deliver."
Investing in the current mutual fund ´stars´. "Often people will see a product that won Fund of the Year last year or they will see a fund that has received good coverage in the news and they will
invest based on a short-term history of performance," says Saar. "Yet if you look at the subsequent performance of funds such as these, you will see that this is not always a good strategy. In fact, the top-performing fund can change each year. A sure way to ensure you participate in market growth is to build a diversified portfolio including funds with different management styles, geographic mixes and asset classes."
Not sticking to your plan. The market has been up and down in recent years and this makes people very emotional with their investments and jittery about short-term losses, says Saar. The result for some has been to ´cash out´ of poorly performing mutual funds. "If you established a proper, diversified plan when you invested, it is important to stick to it even through the dips in the market," says Saar. "The market may get bumpy but because the RRSP is a long-term investment, you should ride out these bumps. The plan accounts for fluctuations but should still reach its goal in the long run." Investors who contribute regularly to their plan are less impacted by swings in the market and can benefit from an investment strategy called dollar cost averaging.
To avoid falling into these and other RRSP investing traps, it is important to take the time to develop a good financial plan. Whether you use a financial adviser or invest on your own, planning and research are essential to creating a successful RRSP strategy for the long term.
This article is intended to provide general information and should not be construed as specific advice. This article is not applicable in Quebec.
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