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Proper diversification among asset classes in your RRSP

by Wayne Cheveldayoff, 2007-02-01

Are you properly diversified in your RRSP?

This is a question I expect everyone with a portfolio has considered and perhaps received advice on from an investment advisor.

If what you have are just Canadian stocks, held directly or in a fund, you are not properly diversified.

Nor would you be if you held Canadian bonds along with the stocks. That is far too limited a selection among asset classes.

Some advisors add cash into the mix, for perhaps 5 to 10 per cent of the portfolio. Cash sits in deposits, treasury bills or money market funds and is available as firepower to buy other assets when they get really cheap.

The trouble with cash is it earns a low return and is a doubtful means to preserve your wealth when short-term interest rates drop below the official inflation rate as they have in the past.

Rather than holding cash in the normal way, RRSP holders would probably be better off if they instead had gold in their portfolio.

Gold is the ultimate form of money and has proven itself over time, especially in the past few years, to be a better preserver of a personís wealth than a T-Bill or money market fund earning a rate of interest barely over the official inflation rate (especially since the official rate understates the actual price inflation that many people are experiencing).

Historical analysis by U.S. economist David Ranson of Wainwright and Co. Economics Inc. shows that in an inflationary environment, a precious-metals allocation of 32 per cent would be required to minimize the effects of inflation over the long term in a typical portfolio that consists of 60-per-cent stocks and 40-per-cent bonds. And if you want to get ahead of inflation, the allocation should even be higher.

Many donít know that precious metals are indeed allowed in an RRSP following rule changes a couple of years ago. For instance, one can now hold gold and silver certificates at most institutions, whereas before RRSP investors were limited to gold stocks, specialty closed-end funds holding gold and silver, or the Millennium Bullion Fund holding gold, silver and platinum.

With the introduction of a new product by Questrade and Kitco Metals, investors can take it a step further and hold gold bullion in physical form (rather than certificates) in their RRSPs. The bullion will be stored at the Royal Canadian Mint.

Unfortunately, due to a rule quirk, the new exchange traded funds (ETFs) holding gold or silver are not permitted in RRSPs since only ETFs linked to stock indexes are allowed.

However, even if there is a good allocation of gold, there is a lot more to consider in achieving proper diversification.

If your stock allocation is centred on Canada, it will be heavily weighted in natural resources and financials, which together make up 70 per cent of the TSX Composite Index.

Canada represents only 4 per cent of world stock market capitalization, so a Canada-only stock portfolio would not have a chance at participating in the other 96 per cent, particularly in sectors not well represented in Canada, such as pharmaceuticals and information technology, or in high-growth areas of the world like China (10-per-cent annual real GDP growth) and India (8-per-cent), compared with North America (between 2 and 3 per cent).

For those wanting to own stocks of companies with growing dividends, analysts have recently pointed out that there are some higher-yielding and better-performing choices among foreign companies.

As for how much of your portfolio should be in international investments, Fidelity Investments notes that historically in the past 15 years, Canadians would have maximized returns per unit of risk if they had allocated at least 40 per cent of their equity portfolios to international investments. In the period 1970 to 1990, the allocation should have been at least 50 per cent.

In the case of bonds, the returns are quite low. Canadian government 10-year bonds are in the 4-per-cent range, barely enough to cover inflation. Interest rates are higher in other countries. Thus, splitting off some of the bond allocation into foreign bonds could bring better returns.

So, are you properly diversified in your RRSP?

Wayne Cheveldayoff is a former investment advisor and professional financial planner. His columns are archived at and he can be contacted at

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©2007 Wayne Cheveldayoff