Blogs & Comment

Where to put RRSP contributions (II)

Yesterdays postwas about picking RRSP (or non-RRSP) investments with risk and diversification in mind. Another point to make is that we may want to think of diversification in a broader sense than just financial assets.
Specifically, as York University professor Moshe Milevsky has urged in his writings (latest book is Your Money Questions), you may want to also diversify against your non-financial assets of human capital (i.e. job, education, experience), house and family.
If you are a teacher, professor, civil servant or otherwise employed in a recession-resistant industry, you may want to consider a very high allocation to stocks. Indeed, the tenured Milevsky is himself going with an equity allocation over 200% (i.e. a leveraged position) to diversify against the high level of bond-like human capital on his personal balance sheet.
But if you are employed in a cyclical industry (like much of the work force) or your income is commission-based you may want to consider a low exposure to stocks. Your human capital is more stock-like and tends to fluctuate in line with the stock market, so you should have a higher proportion of bonds or other fixed-income assets in your financial portfolio to properly diversify your holistic balance sheet.
There are many other permutations to the thesis, as Milevsky points out in his recent book. Investment bankers shouldnt have high exposures to stocks since their job is affected by the stock market. Real estate agents dont need a lot of REITs. University students might want to short the stock market as a hedge against graduating in a year when the economy is in recession and jobs cant be found.
And dont overlook your home and family situation. For example, homeowners may not need too many REITs in their financial portfolios. You may also want to think about how your portfolio dovetails with your spouses you dont want both of you loading up on the same things. Some diversification with respect to each other holdings may help out down the road.
As Milevsky said in a email: Your job is an investment, your house is an investment and even your spouse is an investment. Make sure your RRSP takes those bigger investments into account.