How to Re-invest, Re-evaluate and Re-diversify in post-RSP Season

The 3 Rs: How to Re-invest, Re-evaluate and Re-diversify in post-RSP Season
You know the drill. As the RSP deadline approaches, you scramble to make a last-minute contribution for the previous year. But while it's always a good time to invest in an RSP, many Canadians make the mistake of parking their contributions in a cash account or cash equivalent mutual fund, and forgetting to come back post-RSP season to invest in something that will better help them reach their long-term goals.

The problem: Your contribution winds up generating minimal returns instead of reaching its true growth potential. For example, if you invested your 2009 RSP contribution in a short-term savings vehicle and abandon it for the remainder of the year, you risk missing out on a positive turnaround in financial market returns.

Fortunately, it doesn't take a whole lot of time or effort to avoid the pitfalls of being out of the market unintentionally. Taking the time to meet with a financial advisor, adopting a long view of your investment strategy and diversifying your portfolio are simple steps that can help you meet your retirement goals.

Get re-acquainted with an advisor
Certainly, parking this year's RSP contribution in a savings vehicle is a fast and flexible alternative when you simply don't have the time for a full retirement review. But scheduling a follow-up appointment with a financial advisor is critical. Sitting down with an advisor to analyze your investment portfolio will help ensure that you're in the best position to meet your financial goals and retirement objectives.

For starters, an advisor can help you create an investor profile to determine what types of investments can help you reach your goals. Using sophisticated analytical tools, an advisor can work with you to examine your existing investments to make certain they're in line with your financial situation, including your mortgage and savings. And, best of all, an advisor can help you create a financial plan or carefully restructure your portfolio to help you meet your savings objectives.

Align your financial goals with your aspirations
The key to financial planning is developing an investment strategy that reflects many variables, including your retirement goals, time horizon and risk tolerance. That's all the more reason to decide in advance exactly what your retirement means to you. Do you see yourself riding into the sunset on a cruise liner? Or how about paying for your children's post-secondary education?

Figuring out your aspirations beforehand will help you make important decisions about how to fund your retirement, what supplemental income you'll need, what kind of investments to make and what investment performance level you'll need. What's more, it's important to factor in the financial impact of lifestyle changes such as frequent travel, new hobbies or a vacation home to make the most of your retirement dollars.

Once you've established realistic lifetime financial goals, the next step is to ensure that your investment portfolio is aligned with your long-term financial strategy. A mix of foreign and domestic investments including equities for growth potential, bonds for stable returns and some cash for security will give your portfolio the diversity it needs to reduce risks and increase returns over time.

The benefits of laddering
In today's financial environment, it's more important than ever for fixed-income investors to ensure the highest rate of return on their investments. While it's true that low interest rates can pose a challenge, laddering is a simple diversification strategy that can potentially maximize your returns and reduce your portfolio's sensitivity to interest-rate fluctuations.

Adopting a laddering strategy is easier than you might think:

To ladder your GIC portfolio, start by investing in a range of shorter and longer terms (one year through five years) so that 20% of your portfolio matures each year. For instance, instead of investing, say, $10,000 in one five-year GIC, invest $2,000 in five GICs that mature over one, two, three, four, and five years.
Protect your investment by rolling over the proceeds from a maturing shorter-term GIC into new GICs at the longer term, usually five years, at the best available rate.
When interest rates are falling, the longer-term GICs will continue earning higher rates. When interest rates are climbing, you will be re-investing in GICs with higher rates.
Given today's interest rates, recovering economy and rebounding stock markets, Canadians simply can't afford to park their RSP contributions in a short-term cash solution. Rather, now is the time to meet with a financial advisor who can help you move into long-term growth investments that could provide higher returns over the long term.

Better yet, take the time to ensure that your investment portfolio is aligned with your overall retirement plan. If you're strapped for time, ask about managed portfolio solutions, which provide one-stop diversification in professionally managed mutual fund portfolios. And if you're looking for a guaranteed way to invest, set up a fixed-income ladder with GICs coming due for reinvestment every year. By following these few simple steps, you can secure your financial future.

Could your GIC portfolio benefit from a laddering strategy? The diversification offered by a traditional laddering approach can help protect your investments from the impact of interest-rate changes. The Ultimate Laddered GIC™ also offers higher returns combined with increased flexibility and cashability. It's easy to purchase your laddered GICs online or by visiting your Scotiabank branch.