Thursday, February 17, 2011

RRSP update and foolish common sentiment.

I saw an article in the Toronto Star today about RRSP's and how some guy Tim of Markham wasn't about to invest in his RRSP this year because he's afraid the market is too volatile..  He really should read my blog.

Tim is sadly the last fish on the food chain.  He's availed himself to believe exactly what the mainstream media says.  Since all they report about is the doom and gloom on every market downtick and completely neglect the past few weeks that have been HUGE gains day after day after day.  If you're the last one to the race, you've already lost.  Sorry Tim.  Wake up and smell the constant growth and consistent increasing income offered to you buy even the smallest positions of the big banks.  Remember how much you pay in fees for your chequing account every month?  How much interest do you give your credit card company every month?  And if you're not as impoverished as myself, remember how much extra you have to pay for your house in the form of mortgage interest...  Several years of your life are all working just to pay the interest on your house.

To be honest I'm glad there are many people like Tim out there.  When he decides it's time to get into the market, it's probably high time for you to get out!  All the gains have been had and things will be looking to retreat for a while.

Additionally, if you are in a tax bracket where you owe a substantial amount of money to the government then you're an idiot for not contributing.  By contributing to your RRSP you pay less tax to the government.  Any dollar you pay in tax is a 100% loss and never to be seen again.  You surely see examples of government waste on a daily basis that tick you off.  Guess what!  Your tax dollars paid for it!  So the more you can contribute to YOUR RRSP, the less of your money goes to pay for this government waste. 

Yes you will have to pay tax on the money later when you retire and need to live off of it, but that's the advantage of any RRSP investment plan.  You pay less tax when you contribute, the gains are not taxed while inside the plan (so things can grow faster) and you can remove money from the plan at a bare minimum rate so the amount of tax withheld is a minimum.  (Based on the fact that you will need less monthly income to fund your life in retirement because your housing costs will be lower since you've paid off your house by then, or downsized and moved into smaller digs, or all of your children have grown up and are fending for themselves).  So you can withdraw money only at the rate which you need it.  (And if you've followed my instructions to date most of your income will be coming from your TFSA plan anyway, so you'll barely scrape the bottom of the lowest tax bracket!)

So Tim, I have only one question for you: you like giving your money to the government?  If you're so afaraid of the market volitility you can always buy government bonds, GICs or heck, even savings accounts that are RRSP., ING Direct and Presidents Choice Financial are all offering RRSP savings accounts in the 1.5%-2% area.  So you know you'll still have your money when you think it's safe to invest.

Just remember folks: when Tim thinks it's safe, that means it's time to sell all you have!  NOW NOW NOW is the time to invest.  Plus, for the younger people who read this blog you have 40+ years.  It's perfectly OK for your holdings to dip 15-35%.  Just look back to the financial crash 2 years ago.  The big canadian banks fell in value to half of what they previously were.  If you had held, you would still be up today.  It would have been uncomfortable looking at a 50% paper loss, but hold fast and keep collecting those dividends. 

If you had invested $10,000 in 2007 in any of the big banks, it would have fallen to around $5000 during the 2008/09 crash.  But today, that would be worth $12,000.  (Ish... depending on which bank you bought)  NOT including the dividends you would have collected.

Also, if you had set your stop and stayed out your $10,000 would have sold when it was down to $9000.  And if you had the wherewithal to say out and wait for things to settle your remaining $9000 could have been turned into $20,000 had you caught the market bottom... even if you were 3 months late to the party too!  (Full disclosure:  I chose to HOLD most of my positions.  I only stopped out on a few things.  It's hard to react well to day after day of craptackular market performance...  I saw some opportunities but I was too chicken to embrace them.  I did catch a couple good ones in the first quarter of 2009, but by then it was VERY clear to me that things were back on the up and up.)

In conclusion: don't be Tim.  EMBRACE volitility.  EMBRACE your friends/relatives/collegues/enemies market FEARS and buy when they sell.  Stick with me and 40 years from now you'll be living large.

Next time: how to embrace volitility

Disclaimer: My commentary is a collection of my own thoughts and opinions.  I'm sharing with you why I do what I do.  If you choose to follow my advice do so at your own risk.  I have made money, but I have also lost money.  Be careful, be prudent and don't risk everything you have and everything you can borrow.  If you lose it all you have only yourself to blame.  I can't be held liable since you're the one doing your own trading!


  1. I get about 30% back in taxes for whatever I put into my RRSP.

    Consider someone said to you "I guarantee you a 30% return 3 months from now you can enjoy tax free and odds are you'll break even or earn a small amount over the next few years."

    That would still be a wise investment to me.

  2. Response to Puffin Watch:

    You get 30% back because you're in a higher tax bracket! I don't get ANYTHING back for RRSP contributions. Please remember I'm writing this blog for people like me who are starving artists. The kind of people who often have to decide if it's more important to eat this month or pay for electricity/heat.