RRSP rescue

Here's what investors are doing in a market gone wild-and what they should be doing

By Chris Taylor
Globe Investor Magazine online, February 19, 2009

Annus horribilis-horrible year-is a Latin phrase dusted off by Queen Elizabeth II in 1992 to describe an awful period in which the marriages of her children fell apart and Windsor Castle caught fire.

With all due respect to Canada's putative head of state, 2008 just might trump Her Highness's horrible year. That is certainly true for investors, who have seen their hard-won retirement savings fall into a toxic vat of subprime mortgages, leveraged- to-the-hilt investment banks, clueless insurers and conflicted ratings agencies. Safe havens? Ha! That's a good one. Whatever the causes of the RRSP carnage, not all investors feel like opening a vein and slipping into a warm bath. Take Toronto radio producer Sascha Hastings: If you'd told the 39-year-old a couple of years ago that she would be navigating the markets like a pro, "I'd have laughed in your face," she says.

By being proactive about her retirement savings, Hastings managed to skate through the biggest stock-market collapse in generations. Early last year, with the market still near its all-time high, she felt things were "out of control; [the situation] reminded me of the late 1980s," she remembers. So she pulled about twothirds of her RRSP money out of equities and stashed it in plain-vanilla money market funds.

Score one for Sascha Hastings. But she didn't stop there: She was also honest enough to admit she knew "pretty much nothing" about things like priceto- earnings and debt-to-equity ratios, and so she committed to boosting her investing IQ. Hastings became a rabid fan of the Value Line Investment Survey; she opened her own self-directed account with discount broker Questrade (declining to inform her CIBC financial adviser); and she cranked up her RRSP contributions to almost 30% of salary. Now that valuations are at rock bottom, she's dipping her toes back in, buying recession-resistant stocks like Johnson & Johnson and salivating over every new bargain that crops up. As a programming wonk for CBC Radio's Wachtel on the Arts, Hastings never thought she'd be on tenterhooks waiting for fourth-quarter earnings reports. But Hastings admits that she finds this once-in-a-century market kind of thrilling: "I'm trying hard not to get too obsessed."

For every investor like Hastings, though, there are countless others who have taken it on the chin. By the time 2008 sputtered to a close, the Dow had fallen from 14,000 to below 9,000, and many investors had taken a hit of 40% or more on their retirement portfolios. Those optimistic assumptions you'd plugged into online calculators, assuming a healthy 8% to 10% a year of compounded returns, leading to an early retirement on the sands of the Turks & Caicos? Um, you might want to check your RRSP statement.

"Investors have been like deer in the headlights," says Teresa Black Hughes, a planner with Vancouver's Solguard Financial and past chair of Advocis, the Financial Advisors Association of Canada. "Everyone, without fail, is shocked by the degree of the drop. You can see the fear in their faces. It's especially stressful for those approaching retirement: They're cutting back, not taking vacations, wondering if they'll even be able to make the mortgage or pay the bills any more."

Which isn't to say there's nothing to be done about your ravaged RRSP. In fact, many investors are using the bloodbath to get serious and take their retirement planning to the next level. Some investors are rebalancing their holdings to get back to their ideal asset mix; some are boosting contributions radically to make up ground and take advantage of historically low P/Es; some are choosing to dock in the harbour of ultraconservative investments, at least until the storm passes.

To wit, a just-released Scotiabank investment study reveals that a quarter of Canadians are now opting for safer investments; a third of 50-plus investors are pushing back their target retirement age; and almost 40% are paying much more attention to their investments. Amazingly, more than half are even seeking out financial second-opinions, cheating on their primary advisers, so to speak. "If you want to get your kitchen done, you go out and get a bunch of estimates," says Gareth Watson, director of the portfolio advisory group for ScotiaMcLeod. "If you've got a serious illness, you'll probably get a second opinion from another doctor. Now, investing has become the same thing."

So much for the cliché of terrified investors stashing their RRSP statements in a drawer. Rather, they now seem to be doing the opposite: getting proactive, getting involved, and trying to tack their way through the most violent financial storm in years. "Investors spent the better part of October and November not looking at their statements," says Hughes. "Then the bad news continued to come, and come, and finally they said, 'Okay, I'd better look.' Now the closing-youreyes part is over. They want to feel like they're doing something, like they have some control over all this."

A caveat: While staying on top of your investments is a good thing, the emotional urge to swing into immediate action isn't always your best guide. Just ask any financial adviser: As the bearers of bad news, they're increasingly finding themselves in the business of talking clients down from the rafters. Some shellshocked investors are cashing it all in and buying laddered portfolios of GICs, just to be able to sleep at night, reports David Phipps, an Ottawa-based financial adviser with Assante Capital Management. Others are taking one look at their RRSP statements and making up for the loss by slashing daily costs to the bone, according to Ted Rechtshaffen, president and CEO of TriDelta Financial Partners, a Toronto planning firm. One woman with a multimillion-dollar net worth has stopped eating red meat to save a few pennies; another client in his 60s, also financially set for life, fretted about buying a new pair of skates.

Such is the level of panic on the streets, and you can get a sense of it from how Canadians have been directing their investments. The market niche with the biggest inflows through the end of December, 2008: boring old money-market funds, with $14.3 billion coming in, according to the Investment Funds Institute of Canada (IFIC). Equity funds, in comparison, saw $12.2 billion go out the door. Even balanced funds lost

$1.1 billion net. In short, investors are sprinting for shelter. "People are just sitting on the sidelines right now," says Dennis Yanchus, statistics manager for IFIC, which represents Canada's mutual fund industry. "They're sticking with conservative options at this point, until they see a dampening of volatility. Only when they feel there's a floor will they be moving back in."

Terry Lapain has felt this downturn as much as anybody, even though he's a former math teacher who used to instruct his students in the art of investing. "I always taught my kids to stay diversified," says the 55-year-old father of three boys from Oldcastle, Ontario. "But in this downturn, it hasn't really mattered." To wit: Before the market tanked, he made an ill-timed foray into Latin American stocks in his RRSP, and those holdings fell by half. He even had to say no, when financial advisers told him to shovel more cash into the hard-hit region. "One of the best decisions I ever made," he says.

Continued...