Key Considerations in building a diversified RRSP Portfolio
Saving for retirement through a Registered Retirement Savings Plans (RRSP) is a long-term commitment which for most people is at least 10-years or longer.
There are three primary things to consider when saving for retirement.
1. Your time horizon
Put simply, your time horizon to retirement is how long you will be saving for retirement. Typically, the longer your time horizon, the more time you have to ride out cyclical market fluctuations. Historical experience shows that the market reverts to its mean return over time.
2. Your risk profile
Your risk profile is unique to you. It is basically about how much risk you can tolerate, that is, the risk of losing money in down markets. Generally, you are classified as conservative, moderately aggressive or an aggressive investor, depending on the amount of risk you can tolerate. What you should know is that the greater the amount of risk you can tolerate, the greater the potential returns you can make on your investments.
3. Your asset mix
Your asset mix is the amount of different types of investments, for example, equities, fixed income and other specialty investments that you hold in your portfolio to generate your desired returns.
4. Role of diversification
You can invest your RRSP contributions in a variety of different investment products, including ETFs, mutual funds or any other eligible investment. Depending on your risk profile, you would hold a greater portion of equity investments in your portfolio if you are an aggressive investor and conversely a greater portion of fixed income investments if you are a conservative investor. If you are moderately aggressive, you would typically hold a balanced portfolio with an about equal percentage of equity and fixed income investments.
When building a diversified portfolio, it is always prudent to invest in securities that are not correlated to each other, that is, they do not move in sync during different market cycles.
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