With the pressure mounting to sock away money in an RRSP, people run the risk of making common errors in self-directed accounts, experts say.
Jason Schella, the Bank of Montreal’s regional sales manager for Atlantic Canada, says the most common mistake is investing without an overall financial plan.
“How can I do the right investing if I don’t know exactly where I have to get to?” he says when reached by cellphone en route from Fredericton to Halifax. Identify your financial destination before plotting the map, he urges.
A second error is buying high and selling low – the opposite of what you’d want to do. When a stock is hot, people snatch it up. When it’s falling, they drop it. A savvy investor will plug wax in his ears and ignore the siren song of hot or cold tips. “Time in the market is more important than timing the market,” Schella advises.
In the land of Earl Jones Ponzi schemes, Schella says it’s safest to stick with big-name financial institutions if you use a financial adviser.
“(The bank) is still going to be there, even if one of the individuals wants to go to the Caribbean,” he jokes.
David Shymko, an investment counsellor the Vancouver’s MS&C, says a common mistake is investing for too long a term in government or corporate bonds. “If there’s an expectation for inflation, those bonds will go down in value. There is capital risk associated with investing too long when the expectation of interest is rising.”
If you’re going to go with speculative stocks, hold them personally, not in your RRSP. They regularly fluctuate and when you have a loss in an RRSP, it’s forever, he says. “There’s no way you can get any tax savings for a capital loss in an RRSP.”
Another problem he sees is people opening too many accounts as they chase the best deal each year. “They get this whole mishmash of accounts and they’re often paying an annual fee for each account,” he explains. Consolidate to one or two accounts.
Some people even wind up with too large an RRSP. Because the tax-shielded money has to come out eventually, investors may find themselves “stuck in the highest tax rate forever.”
Keep an eye on your final financial destination to avoid that.
Finally, Shymko warns RRSPs aren’t the best plan for everyone. Workers in a low tax bracket may do better with a tax-free savings account (TFSA).