Is My RDSP Investment Portfolio Overly Conservative?
Last week, I had an online meeting with a prospective client. This is a mother of a 4 years old daughter who is diagnosed with autism. During our conversation, we were discussing how should we invest the money within the RDSP account for her daughter. The mother did not have much investment experience, and all she had invested before was GICs. She was asking for my advice whether the RDSP account should be fully invested in the same way as she did before. Here are my suggestions to her.
Understand that RDSP is for long term savings
Let’s make this very clear, the Registered Disability Savings Plan is designed for long term savings. Upon withdrawal, any disability savings grants and bonds received in the preceding 10 years will have to repay back to the government. In many cases, the investment duration can easily ranged from 10 years to even over 30 years. So why is that important to know? The reason is usually the shorter the investment duration, the more conservative the investment should be. On the other hand, when a well diversified portfolio is staying invested for a long period of time, even when there are market downturns, it will have a far greater chance of getting recovered upon withdrawal.
Understand the investment goal and risk tolerance for your RDSP
There’s not a single investment that is the best option to everyone. It really comes down to whether it fits into individual’s circumstance. The way I define suitability is when one is willing to accept a certain amount of risk in return of the potential gain. Yet, GIC is probably one of the safest investments, but the tradeoff is their return is extremely low. For example, *a 1 year term GIC from BMO is only giving 1% annual interest. On the other hand, **according to CBC news, the cost of inflation has reached 2% this April. This means the 1 year GIC return cannot even catch up with the inflation. If this situation continues, it will devalue the savings in the long run. Of course, the GIC rate and the cost of inflation may vary overtime, but if one were being overly conservative in their investments, a lot of potential growth opportunity could be missed out. In one of my previous post, I illustrated how one may contribute $46,500 into the RDSP account, with a decent annual return, their disability savings can grow to $398,891. (Please refer to http://samuelconsultant.com/disability-savings-example/)
Going back to this client’s case, after a careful analysis of her investing expectations and risk tolerance, we found out that a portfolio with 50% of equities and 50% of fixed income will be a suitable choice for her. I then suggested several investment options that are aligned with her suitability. This mother is comfortable with the moderate volatility that may be involved, and most importantly, without missing all the potential growth opportunity, the disability savings will be growing for her daughter according to her suitability in the long run.
- * Interest rate is obtained from BMO website on June 8th, 2014 (https://www.bmo.com/home/personal/banking/rates/gic-term-deposits)
- ** CBC News: Canada’s inflation rate hits 2-year high of 2% (http://www.cbc.ca/news/business/canada-s-inflation-rate-hits-2-year-high-of-2-1.2651812)
- Image Courtesy Stuart Miles/ FreeDigitalPhotos.net