Mr. C asked us “Do you have guidelines for what percentage of RRSP assets should be fixed-income, such as laddered bonds? I now have about half my portfolio as unregistered equities and half registered inside a self-directed RRSP. About 66 per cent of my RRSP is equities and 33 per cent of my RRSP is now cash with plans to buy fixed-income products.”
First off, we think that Mr. C is wise to consider both his unregistered stocks and his RRSP as two parts of an overall portfolio. If Mr. C puts his RRSP
cash into fixed-income investments such as bonds, they’ll account for 16.5 per cent of his portfolio (a third of his RRSP, which is half the overall portfolio – or 0.33 times 0.5). This means that stocks will make up the other 83.5 per cent of his portfolio.
Personal circumstances Whether or not this is a suitable mix for Mr. C depends on his unique circumstances: we would first ask him “are you working or retired? If you’re working, in how many years do you plan to retire? Are you self-employed or a salaried worker? If you work for a company, is that company, your job and your income secure? Do you belong to a company pension plan? If so, is it a defined benefits or a defined contribution plan? What’s your risk tolerance? Do your stocks pay dependable dividends? Do you expect to inherit a lot of money?” There are many other factors that could affect his situation.
If Mr. C is working and plans to work for many years to come, for example, then his current asset mix may be suitable. After all, stocks have traditionally delivered better returns than bonds in the long run. But if Mr. C is retired, then he should probably increase the percentage of bonds above the 16.5
per cent. He should cover his expected cash needs for at least the next five years – 10 would be better.
If he’s self-employed, Mr. C should probably hold a greater percentage of bonds. Or he could buy investments that should do well precisely when his business is likely to do poorly. If Mr. C works for a secure company, on the other hand, he can probably afford to hold a lower percentage of bonds.
Is Mr. C’s job secure? If so, then he can probably hold fewer bonds. More important, is his income secure? If he’s, say, a commissioned salesman whose income could dry up overnight, he should hold more bonds. If he works for the government, by contrast, then he can ease up on his bond holdings.
If Mr. C is in his company’s pension – particularly a defined benefits plan – then he can afford to take more risk and his current mix may be suitable. But if he plans to mostly live off his investments, then he should likely increase his percentage of bonds.
This may be a suitable mix if Mr. C can accept a fairly high level of risk. But if this risk leads to sleepless nights, then 16.5 per cent in bonds is too little.
If Mr. C’s stocks pay dependable and rising dividends, then he’ll already have some income and can afford to hold fewer bonds. But if Mr. C owns mostly growth stocks that pay no dividends, we suggest he sell some of these and shift the cash into bonds. Unless, of course, Mr. C stands to inherit a fortune.