Thursday, November 27, 2008

To RRSP or Not to RRSP?

That is the question. Whether 'tis noble to suffer the slings and
arrows of declining stock markets, what do I do with my money in 2009.

I have often wondered of late - what will be the reaction of people who normally make their "last minute" contributions to their RRSP's given the recent market declines. Most clients who contribute monthly (and continued to do so) are now reaping the rewards of buying at reduced prices. While my personal opinion is that the smart money would seem to be on buying at huge discounts; I am sure there are likely people out there who remain fearful of further market declines. One amusing thing I have heard from several clients is that they intend to shred or burn their year end investment statements instead of reading them. Not sure that ignoring reality is beneficial, but if it works for you, then go for it.

Here is a simple fact to consider. If you earn over $40,000 per year, and make a $1,000 contribution to an RRSP, this provides a tax "refund" of approximately $310. In other words, when you file your taxes, you get $310 back from the government. Essentially, you are out of pocket $690. If your investments then dropped by 20%, you still have $800 on a $690 investment.

Now while holding onto your funds may be necessary for some people, reality is that people still want to retire, children still need help paying for education and these things cost money. Everyone loves a bargain when shopping for a gift, yet buying investment products at a discount still seems a difficult concept for some people.

Here is a small amount of historical perspective - since 1956, Canadian stock markets have gone through 11 periods of "bear markets" and 11 periods of "bull markets". The average bear market lasted for 10 months and led to declines of an average of -26%. The average bull market lasted for 46 months and led to increases of an average of 186%.

So what should you do? Unless you have abandoned the idea of retirement or saving for a child's education completely, then it's simple - follow your plans as if the markets had never gone down. If you want to alter the plan at all, then SAVE MORE. There will never be a downside to having more funds for the future and everything is on sale. Reviewing your current plans to ensure that your goals have not changed, discussing your "risk tolerance" and then sticking to the plan will always win out in the end. Saving for retirement is not something you stop doing when markets go wrong - if that was the case, then you should do more when markets go up. I have often said to people that whatever you think you should do, do the opposite. The reason is that people can be influenced by the media. Negative stories sell therefore it's easier to tell you how much you lost then tell you how to make up for it.

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