The Money Management Newsletter: RSP Planning
Maximize your RRSP returns when interest rates plunge

Guaranteed Investment Certificates, term deposits and savings accounts used to be the RRSP investment of choice for security-conscious investors. The promise of a guaranteed return over a specific period of time, with no loss of principal, was extremely appealing. But with GIC rates hovering in mid single-digit range, many savers have turned to the investment world of mutual funds and stocks to generate higher returns.

To illustrate the return potential of mutual funds vs. GICs, a well-known Canadian pension fund analyst took a look at the growth of a single Canadian dollar in two hypothetical portfolios. Portfolio A, the so-called "secure" portfolio, was entirely comprised of five-year GICs, purchased each month and re-invested at maturity. Portfolio B consisted of Canadian stocks (40%), Canadian bonds (40%), U.S. stocks (12%), and international stocks (8%).

Between May 1977 and December 1995, the GIC portfolio grew by 9.8% annually, to $5.76. The fund portfolio provided almost double that return (even allowing for management fees) -- 13% annual growth and a value of $10.19. The fund portfolio's one-year returns exceeded those for the GIC portfolio two-thirds of the time, its five-year returns beat the GIC portfolio three-quarters of the time, and over the long haul -- ten-year periods -- the fund portfolio outperformed GICs 97% of the time!

Mutual funds can obviously pay off. And the longer you hold quality funds, the more confident you can be that your investment will outperform GICs purchased within the same time period. Inside or outside your RRSP, a well-diversified mutual fund portfolio, containing a prudent mix of growth and fixed income funds, could provide a better long-term alternative to GICs, along with the prospect of considerably better returns. Your plan will bloom with dividends and interest income in the short term as well as the potential for capital gains in the long term.

When adventuring beyond GICs for the first time, the key is diversification, understanding your own attitudes towards risk, setting goals and satisfying your needs. The Fiscal Agents Cornerstone Planning approach may call for three to five carefully-selected mutual funds long on security and short on volatility as opposed to a single fund. International diversification within your RRSP portfolio offers you additional protection: international funds have tended to do better than Canadian funds over the long term and they're also a great hedge against currency fluctuations. You are allowed up to 30% foreign content in your RRSP, and wise investors will make the most of this.

One final tip: stay the course during market corrections. The value of specific mutual funds is not guaranteed, and the market does go through lows as well as highs. If your portfolio is properly allocated in the first place, market downturns should not be a cause for concern for you but rather a buying opportunity.

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