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Smart ways to inflation-proof your RRSP

by Wayne Cheveldayoff, 2006-01-12

If you don’t have the right type of investments in your RRSP, inflation will eat into your retirement savings.

Bank savings deposits, GICs or even traditional bonds held within an RRSP are unlikely to provide the inflation-proofing you need.

In the case of bonds, the 9.5-per-cent annual returns recorded over the past 15 years in the Scotia Universe Bond Total Return Index are definitely not indicative of what you can expect from traditional bonds in the future.

Since the early 1980s, bond yields have fallen from double-digit levels to less than 4 per cent. This boosted bond prices and, as a result, total returns for bonds matched those for stocks.

But short-term interest rates are now rising and investors will be lucky to receive in future years as much as the current yield to maturity – around 4 per cent for Government of Canada long-term bonds.

That kind of return is not going to be much better than inflation, as anybody needing to heat a home or fill a gas tank already knows. Monetary policy is not necessarily going to keep the total inflation that we experience in the targeted 1-to-3-per-cent range because the target applies to core inflation, excluding food, energy and indirect taxes.

What, then, can provide better inflation-protection in an RRSP?

Stocks are a much better bet to beat inflation than traditional bonds. The total return of the S&P/TSX Composite Index averaged 10.9 per cent annually over the past 15 years, which was consistent with returns recorded over much longer periods, and that is probably what we can expect in the next 15 years.

The same goes for the U.S. S&P 500 stock index, which recorded a total return averaging 11.7 per cent over the past 15 years.

Recent market action shows that commodity stocks can bring outsized returns during a period when inflation is picking up. Commodities, particularly energy, were behind the 22-per-cent gain in the S&P/TSX Composite Index last year while the S&P 500 Index was flat.

Another asset that will do well during inflation is a real return bond (RRB). The interest payments and principal of RRBs are linked to the total CPI (including food and energy). So, with an RRB in your RRSP portfolio, you can count on a real return (currently about 1.7 per cent annually on long-term Government of Canada real return bonds) plus the gain in the CPI.

In the last six months, one of the largest real return bond funds in Canada, TD Real Return Bond Fund, with assets of $2.5 billion, gained 3.5 per cent for unitholders (despite the annual management expense ratio (MER) of 1.6 per cent). By contrast, the Trimark Canadian Bond Fund, made up mostly of traditional bonds, returned only 0.74 per cent (after fees). The Scotia Universe Bond Total Return Index was up 1.5 per cent for the period.

Another place to look for inflation protection is precious metals such as gold and silver.

What inflation really is about is the devaluation of paper money. People around the globe concerned with preserving wealth seek to keep it in real property, and precious metals, in jewelry, coins and even bars, have the added advantage of being highly transportable real property.

The recent gain in the gold price against all currencies is a reflection of inflation-protection actions being taken by many around the world who have lost faith in their home-country currencies.

The federal Government last year changed the rules, effective February 23, 2005, to allow RRSPs and RRIFs to hold gold and silver bullion coins, bars and certificates.

Investors interested in precious metals may also consider investing in the Millennium Bullion Fund, an RRSP-eligible mutual fund holding gold, silver and platinum, or one of two closed-end funds traded on the TSX – Central Fund of Canada (gold and silver) and Central Gold-Trust (gold).

Unfortunately, two gold bullion exchange traded funds (ETFs), namely Streettracks Gold Trust (listed on the NYSE under GLD) and iShares COMEX Gold Trust (listed on the AMEX under IAU and on the TSX under IGT) have been deemed by at least some investment dealers to not be eligible for RRSPs, since the rules specifically allow investing in foreign trusts linked to stock indexes but not at this time to other things.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2006 Wayne Cheveldayoff