Help a Reader: Allocation of Investments

Here's an email I recently received from a reader:

My employer offers its employees to participate in a savings plan aka RRSP. My employer will match up to 6% of my contribution which is very good considering the economy and some other companies that I have worked for in the past. Currently, I am contributing 10% of my gross income for a combined total of 16%. The company has a 3rd party, Sunlife, that manages the accounts and it offers seven different funds that you can allocate percentages too. These funds are the following and in brackets is the % of which fund that I contribute into:

• Daily Int. Acct (Cash) (5%)
• TD Canadian Index (20%)
• Company Shares (15%)
• TD US Index (15%)
• TD International Index (20%)
• TD Canadian Bond Index (20%)
• TD Premium Money Market. (5%)

I find their website pretty cumbersome and really doesn't tell me the information that I am interested in, ie historical returns, gains/losses, etc. I am curious if these percentages can be allocated more effectively. I am turning 30 this year so I won't be looking to take these out until retirement and unfortunately, our RRSP's do not qualify for the 1st time homebuyer plan which I am still confused as to why it doesn't, but I digress.

Any suggestions for him?

Comments

[Sarah]

Disclaiming that I know nothing of Canadian taxes or retirement plans, you probably shouldn't be investing anything in your company's shares unless you are getting a very significant discount. By doing so, you are exposing yourself even more than you necessarily are to the risk that your company will collapse.

In addition, 35% in international funds seems a little high, even for a thirty-year-old!

[Jim]

I agree with Sarah about the company shares. You're double exposed there in case the company has problems. You could end up losing your job and losing 15% of your retirement in one swoop. I'd stop putting shares there or at least cut it down to 5% max.

Jim

[Andy J]

Surely he means the company matches up to 6% of his SALARY and not 6% of his contribution. That would be a pretty weak company match!

[Andy J]

Daily Int. Acct (Cash) (0%)
TD Canadian Index (15%)
Company Shares (5%)
TD US Index (40%)
TD International Index (30%)
TD Canadian Bond Index (10%)
TD Premium Money Market. (0%)

[Nick]

I agree with Andy, for a long term look in a retirement account, I would put everything in the indexes. No need to put your investments in your company shares unless you are getting a discount as you will gain exposure to them in the index.

Daily Int. Acct (Cash) (0%)
TD Canadian Index (20%)
Company Shares (0%)
TD US Index (40%)
TD International Index (30%)
TD Canadian Bond Index (10%)
TD Premium Money Market. (0%)

[Kenny C]

I am the OP and with regards to the company shares, I work for Exxon Mobil with what I consider a very stable job. We do get a small discount for company shares, not sure of the exact amount. And yes, the company matches 6% of my salary, not 6% of my contribution. Thanks for the replies so far and keep them coming. I am learning more about investments everyday thanks to FMF's blog. :)

[Traciatim]

I'm not sure why your RRSP would not be eligible for the HBP, possibly the company portion doesn't vest or a certain period of time? You should be able to get an explanation from your HR department, or from Sun Life

In any case, if it were me I would drop the Daily Interest, Drop the company shares to 5% or less, and only have any at all if you really like your company, and I would also drop the money market.

In fact, my RRSP through Manulife Financial is simply split 29% in a Canadian Equity fund and 71% in an international (including US) fund. The reason I do this is to keep an even balance between Canada, the US, and the rest of the world. I am 29, as I approach 40 and beyond I would contemplate moving some funds to safer areas at opportune moments.

You may want to cut back your contributions to 6% through your work plan just to get the match and either open a TFSA, or another RRSP with another institution if your work has restrictions on withdrawals through your current plan.

You should check out Canadian Capitalist, a great blog for Canadians. Also if you have more questions you can direct them my way at my nick name used here over at gmail dot com. I'm no professional money manager or anything, but I'm pretty good at finding information and know more than the average person about RRSPs and personal finance (at least, that's what the people at work tell me).

I am about your age and I have 63% in US Index, 2% in company stock, 20% in Intl Index, and the rest in stable investments. Considering that I also know nothing about Canadian funds, but assuming you would like to invest in them, here is what I recommend.

Daily Int. Acct (Cash) (0%)
TD Canadian Index (31%)
Company Shares (2%)
TD US Index (32%)
TD International Index (20%)
TD Canadian Bond Index (10%
TD Premium Money Market. (5%)

These are the percentages you want to average at, so you may need to shift some funds around or halt contributions to the company stock until the other areas of your portfolio are built up more. I would also contribute some money to a Roth IRA if you are eligible to diversify your tax in retirement.

Most company savings plans or 401k's do not have first time homebuyers plans, but most allow you to take a loan, although I would not recommend it. Roth IRA's do allow the 1st time homebuyer withdrawal but in either case I would not recommend taking money out of your retirement fund to buy a home. If you need to cut back on your contribution to save for a down payment, that is a better option.

[rwh]

The only thing I would add is you might want to check the fees in your current accounts and if they are above 0.2 or 0.3% consider moving your above the match contributions to a different broker with lower fees. I don't know how a company such as Vanguard handles investments from Canada, but it might be worth looking into.

But if doing so messes up your Canadian taxes that may not be a wise decision.

[Matt H]

If your employer is ExxonMobil, any US index is going to is going to have a good amount of that too (in fact, it's probably right at the top of the list). So there's some overlap there. In most cases I'd never suggest allocating anything to company stock, but this time, you might as well if you get a bit of a discount.

But the most important thing to think about is your risk tolerance. It's a good sign that your question is about asset allocation policy rather than, "OMG! what am I going to do? I lost half my money last year!" But think about it: are you absolutely committed to leaving your retirement money alone for 20 years or more? Are you completely comfortable with market ups and downs, including the sickening nose dive most of us took last year? If so, you could probably reduce your allocation to cash and bonds and go all equities for a while. Start moving back into cash and bonds when your time horizon is down to 10 years or so.

After you've figured out the percentage you're comfortable having in equities, bonds, and cash, the rest is pretty much details. Just focus on being diversified and keeping costs low, which favors index funds.

[Kenny C]

Thanks for the comments thus far and thanks to Traciatim for offering his help in the future and posting the Canadian Capitalist blog.