Blogs & Comment

Where to put RRSP contributions

Whatever investment you are planning to add to your RRSP portfolio, some consideration should be given to how it fits in with the rest of your holdings. Is it likely to move in the same direction as an already dominant holding, thus increasing volatility and risk? Thats not good.
Itwould be better if the new holding tended to move in the opposite direction. Then volatility and risk would be reduced in your portfolio.
For example, if your risk profile suggests 60% in stocks and 40% in fixed-income investments, you might not want tobuy a stock or equity fund if your asset allocation has already been pushed up to 80% stocks and 20% bonds by market trends. You would be better off adding a fixed income investment.
This is a rather simplified example. Things can often be a lot trickier.
One illustration is selecting a mutual fund to represent your weighting in Canadian equities. Lets say you put 40% of your portfolio into the fund because you want a 40% allocation to Canadian stocks. But many mutual funds investing in Canadian stocks are allowed to have 20% or more in non-Canadian securities, so your actual exposure to Canadian stocks can be underweight by a third or more, compared to what you want.
And over time, the portfolio manager may vary the funds proportion in non-Canadian stocks. So even if you took this aspect into account when you first bought, your exposure to Canadian stocks over time could end up different than what you wanted.
More to come on managing risk and diversification in next post.