Your RRSP – Learn from the pros

Everybody wants your RRSP money. The problem is that they all have different ideas about where you should put it.

The banks want you to invest in their GICs and mutual funds. Brokerage firms push self-directed accounts. Insurance companies tout the benefits of their segregated funds.

What to do?

Start by understanding that your RRSP is actually a mini-pension plan. In fact, it may be the only pension plan you’ll ever have, apart from the CPP, as fewer employers offer retirement benefits these days. So you’d better take good care of this money. It may be the difference between a comfortable retirement and one lived on the cusp of financial insecurity.

That means thinking like a pension fund manager. These folks are paid big bucks to look after hundreds of millions of dollars in savings. They know a lot more than most of us about how to earn decent returns in their plans without undue risk. You could do a lot worse than following their leads with your own RRSP.

If you’re going to take your cue from the pros, start at the top. Take a look at how the Canada Pension Plan Investment Board (CPPIB) deals with the approximately $275 billion under its mandate. The Canada Pension Plan ranks among the 10 largest investment funds in the world, so if they don’t know what they’re doing, we’re all in trouble.

Fortunately, they’re doing just fine. As of the end September 2015, the CPP was showing a 10-year average annual compound rate of return of 7.3 per cent. By comparison, the average global balanced fund returned just over four per cent during the same period.

So what are the CPP money managers doing that we need to emulate? For starters, they’re downplaying Canada. As of the end of March 2015, less than one-quarter of the fund’s assets were invested in this country. Canada may be our home and native land, but the CPP’s financial gurus don’t see it as a particularly attractive place to invest right now.

Instead, they’re steadily decreasing their exposure to Canada and becoming increasingly international in outlook, diversifying risk and seeking opportunities in global markets. As of March 2014, 31 per cent of the fund’s assets were invested in its home country; one year later that percentage was down to 24.1. And only a small part of that is in Canadian stocks (7.3 per cent of the total assets). The rest is in fixed-income securities and cash.

The biggest chunk of CPP money (38 per cent) is invested in U.S. assets. Continental Europe has drawn 11 per cent of the CPP’s money, Asia excluding Japan has 8.7 per cent, the U.K. has 5.7 per cent, and the rest is spread around among Latin America, Australia, Japan and other locations.

Now ask yourself: Does my RRSP portfolio look anything like this? The answer in most cases will be absolutely not. We’re notoriously Canada-centric when it comes to our personal savings. The idea of putting three-quarters of our money into global securities is anathema to most people.

But that’s exactly what the experts are doing for the simple reason that returns here at home have been lousy in recent years. We’re coming off an 11 per cent loss on the Toronto Stock Exchange in 2015 and, given the depression in the energy and mining sectors, this year doesn’t look any better.

The message is clear: When you’re making your RRSP decisions this year, focus on U.S. and international securities. For most people, mutual funds or ETFs are the best way to achieve this.

And keep some bonds and money market funds in your mix. The CPPIB holds 26.1 per cent of its money in these low-risk securities. Why should you do something different?

I realize that for some readers, this implies a drastic overhaul of their RRSPs. In some cases, that may not be needed. But unless you have done better than 7.3 per cent a year over the past decade, you may want to take a close look at the CPPIB formula. It works!