Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.
Today’s tip: “If you take money out of your RRSP, do it in a way that strengthens the portfolio you leave in the RRSP.”
Two weeks ago, we wrote about how to achieve a double win—and avoid a double loss—in Registered Retirement Savings Plans (RRSPs). (View the daily post here.)
Today we discuss another aspect of RRSP investing: the best approach for investors to take when they feel the need to “raid” their RRSPs in order to raise cash.
We have three specific suggestions on what to sell first when you raise cash from your RRSP:
Sell juniors. That is, sell stocks of companies that have not yet managed to establish a history of earnings. They are a poor choice in your RRSP anyway. That’s because juniors expose you to a high risk of loss.
If you lose money in an RRSP, you lose the opportunity to make your money grow on a tax-deferred basis, and you can’t use your loss to offset a taxable capital gain.
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Leveraged investments magnify losses just as much as profits
Sell foreign holdings. Foreign investments come with more risks than Canadian investments. These include currency fluctuations, political upheavals, deep-seated corruption and so on. The further you are from a market or an investment, the less likely you are to spot these problems ahead of time.
It pays to be particularly choosy about foreign investments you do include in your portfolio. Our favorite ‘foreign’ investments are shares of North America-based multinationals.
Sell leveraged investments. This includes heavily indebted companies as well as warrants and the capital shares of split-share companies. Leverage magnifies your profits when prices rise, but it works two ways — it also magnifies losses when prices fall.
It’s generally a good idea to limit your leverage, but especially at times when you need to take money out of your RRSP.
Our investment advice: By selling your riskiest investments you not only raise the cash you need, you also make the portfolio you leave in your RRSP stronger over the long term.
COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
Are there any investments that you regret holding in your RRSP? Are there any investments you are sorry you did not put into your RRSP earlier? Let us know what you think.
Comments
Blaine
Yah, I suppose at this point I am a little remorseful that I put Wajax in my RSP. I did it because it had a great yield (recently been trimmed), but it has given over 30% back to the market since. I intend to hold because I believe it will recover, but I am approaching 65 so in hind site it was likely too risky for an RSP at this stage in life.
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Yah, I suppose at this point I am a little remorseful that I put Wajax in my RSP. I did it because it had a great yield (recently been trimmed), but it has given over 30% back to the market since. I intend to hold because I believe it will recover, but I am approaching 65 so in hind site it was likely too risky for an RSP at this stage in life.