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Norm Speaks
Many investors suffer from procrastination and leave their RRSP decisions to the last possible moment. If you’re part of this group then I’m right there with you. Although I don’t leave things to the last possible moment, I have been known to top up my RRSP with only a few days to spare.
Luckily I have a two-pronged advantage when it comes to RRSP procrastination; I manage my own money and I stash the new cash into a frugal money market fund. The last thing that I want to do during the heat of RRSP season is to make long-term investment decisions in a last-minute rush.
Money market funds are good places to stash cash because they are usually very safe. Typically money market funds buy short-term government bonds that mature in less than a year. In this way, buying a money market fund is sort of like buying a bunch of GICs that come due quickly. As a result, money market funds are usually very safe but they also provide little interest.
You probably don’t want to stick with a money market fund because most investors’ RRSPs should be geared to the longer-term. When it comes to longer-term assets such as stocks, you can buy at any time but if you’re in a rush then you might not get a good deal.
If you invest with the aid on an advisor, they might not be able to devote enough energy to your situation during this busy time of the year. So, give them a call – right after reading this edition of the Canadian MoneySaver. You’ll get more focused attention from your advisor early in RRSP season. The second solution, for die-hard procrastinators, is to plunk the money into your RRSP and stash it in a money market fund with no-loads, no deferred sales charges and modest fees. The money can then sit in the fund until you can arrange to have a longer meeting with your advisor after RRSP season. In this way, you get to reduce your taxes and gain the benefit of good advice when your advisor’s schedule is a little less frantic. Mind you, make sure that your advisor has approved your plan before proceeding.
Selecting a low-fee money-market fund is very important. Low fees (or management expense ratios) are critical because there is very little a money market fund manager can do to increase returns. They are stuck buying very-short-term bonds which don’t yield much. Near the beginning of 2005, the average yield on 1-3 year government of Canada bonds was close to 3% and three-month bonds (or treasury bills) provided a yield of about 2.5%. All in all, a disappointing but safe rate of return.
Fund fees cut right into raw return and, according to globefund.com, some money market funds charge more than 2% of your investment each year with many funds charging more than 1.5%. A 1.5% annual fee is more than half of the interest provided by short-term government bonds. In other words, more than half of your return goes to the fund and you get less than half, which is a not particularly fair bargain!
Fortunately low-fee money market funds are available from a number of good fund companies. Altamira has a T-Bill Fund with an annual fee, or MER, of only 0.38% with a minimum investment of only $1,000. The Legg Mason T-Plus fund is also quite reasonable at 0.44% with a minimum investment of $2,500. For investors with more money to invest, the money market funds from PH&N and McLean Budden also charge modest annual fees of 0.48% and 0.55% respectively. Given the parsimonious yield on short-term bonds, I want to pay less than 0.70% on my money market funds.
Suggesting a low-fee fund to your advisor might also reveal whether they are willing to be a hero. If they insist on a high-fee money-market fund then you might want to shop around for a new advisor after RRSP season. Most good advisors are more than willing to take a hair cut on money market funds; after all, they shouldn’t expect to rake in high fees from your savings account.
As always, it is best to be early and you should try to make your RRSP decisions with care. Even if you do decide to put money into your RRSP at the last minute, don’t be in a rush to buy risky assets.
Sources: Current Government Bond and Treasury Bill rates can be found at www.bankofcanada.ca
Date: Feb 2005
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