5 Tips for Investing in Stocks
with Your RRSP & TFSA
5 Tips for Investing in Stocks with Your RRSP & TFSA
If you’re at a point where you’re deciding how to invest your Registered Retirement Savings Plan (RRSP) or your Tax-Free Savings Account (TFSA), congratulations. Just having set up these accounts puts you on a strong financial path towards retirement.
You’ll need to decide on an investment strategy for your tax-advantaged accounts. The goal is to boost your retirement savings but to do so in a way that’s conscious of fees and individual factors like your risk tolerance level and your time horizon. With an RRSP, your investment horizon is based on your current age and when you’ll likely retire, while your TFSA may have a different horizon based on your savings goals.
There’s not necessarily one way to identify the best ways to invest these accounts, because not every investor is the same. If you’re older, you may need to move toward less risky investments because you’re nearing retirement. If you’re younger and you have more years of earning before you retire, you may be able to take on a riskier investment strategy.
With your RRSP account, you can invest in individual stocks as long as they’re traded on major domestic or foreign exchanges, cash, bonds, index funds, exchange-traded funds, and mutual funds. You can also invest in gold and silver, mortgage-backed securities, and shares in certain domestic small businesses.
Regardless of where you are in your investment journey, stocks should make up at least a portion of your strategy, and the following are five tips to keep in mind.
1. If you have the time, look towards growth stocks
Growth stocks are company shares that are expected to grow ahead of market averages. A growth stock, while poised for acceleration, will not usually pay dividends. The reason these stocks don’t pay dividends is usually that companies want to reinvest earnings to continue their rapid growth trajectory.
As an investor, you would earn money when you eventually sell your shares.
Investing in growth stocks is risky because you could take a loss if the company doesn’t end up doing well. That’s why this is a tip reserved typically for younger investors who have a 20-to-30-year window before retirement.
If your investment horizon is long, you also need to focus on being a disciplined investor. Don’t think about short-term fluctuations. If you have a shorter window of time, your approach may be more about rebalancing and also moving towards income-creating holdings, so growth stocks might not be a priority for you.
2. Diversify your holdings
Regardless of where you are in your career or how long until you reach retirement age, you should always focus on diversification in your RRSP and TFSA investments. This means that if you are younger and further out from retirement, try pairing high-risk, high-growth investments with lower-risk options paying dividends.
What novice investors often don’t consider is the many different forms of diversification that you can integrate into your portfolio. For example, maybe you mix high and low-risk stock holdings, but you could also diversify in terms of location.
You might want a portfolio with exposure outside of Canada, which can mean the U.S., Europe or emerging markets.
As you’re choosing stocks or funds, you will want to ensure that you include those perhaps less glamorous but also reliable picks. For example, you will want to balance your portfolio with companies that have strong, consistent cash flows, strong balance sheets and an excellent management team at the helm.
3. Build a portfolio of mutual funds
Mutual funds are one of the best options if you’re looking for a way to invest in stocks as a passive investor. Mutual funds offer inherent diversification, and they allow you to easily build a strong, well-managed portfolio even if you aren’t an expert investor.
You can identify a mutual fund based on how in-line it is with your investment goals and risk tolerance.
Many mutual funds will have a significant portion of large-cap stocks paired with a smaller proportion of small-cap, foreign, and intermediate-term bonds, but every fund is going to be different in specific allocations.
4. Keep an eye on fees
While mutual funds have tremendous benefits for investors, you don’t want to choose funds with fees that are too high. It can be very easy for fees to take a significant chunk of your earnings.
Of course, there are going to be fees and costs associated with any fund, but you want to do your homework, using fees as a basis for comparison. Actively managed funds are usually going to be more expensive, but the tradeoff here is that you’re getting the power of analyst and expert-based research backing the portfolio.
5. Save Smart
Finally, you want to be putting as much money toward your investments as you can, regardless of the breakdown of your portfolio. Be smart with your savings, and start as early as possible. Contribute as much as you can, and make contributions early in the year to maximize the effects of compounding.