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The Money Management Newsletter: RSP Planning
Your RRSPs: Mix it up!

Your key to investment success is diversification. Indeed, determining your asset mix -- the proportion of your portfolio you place in equity funds, fixed income investments, cash and so on -- is the most critical investment decision you can make.

That's no exaggeration.

In fact, one study, which reviewed the performance of 91 large U.S. pension plans between 1974 and 1983, found that the decision of which asset class to include or exclude from a portfolio as well as the long-term weightings of each asset class explained 93.6% of the variation in performance results!

In other words, the mix of assets within your RRSP portfolio accounts for 90% of your return over a long period of time. To put it another way, the specific investments that you put into each asset class only have a 10% impact on your ultimate return.

Why is this? Investment markets tend to move independently of one another. So a broadly-diversified portfolio offsets the risk of one particular investment slipping in value. If equities are taking a beating, another asset class can offset part of the decline. If short-term interest rates drop, long-term rates may hold steady. During periods of soaring inflation, precious metals frequently take off. And if the entire Canadian market drops, international investments may be on an upward swing.

There are many different ways to diversify:

• First and most importantly, get representation across major asset classes. A portfolio that contains a range of money market investments and cash for safety, other fixed income investments for income, equities for long-term growth, and precious metals or gold as a hedge against inflation is ideal. Four to seven well-managed mutual funds should do the trick.

• Select a variety of securities within each asset class. Mutual funds are ideal if you lack the expertise to pick individual stocks since each fund invests in many different securities.

• For term investments, choose items that mature over a variety of time frames to reduce your re-investment risk.

• Mix up the volatility of your investments.

• Vary the liquidity. It's wise to keep some money in cash, but tie up some for the long haul.

• Consider different management styles. Growth and value styles of investment management often come into favour at opposite times.

• Go for geographic and currency diversification. Invest in the global economy up to your foreign content limit and use the fully RRSP eligible clone funds to expand your foreign content beyond the normal limits.

Mutual funds are the ideal investment for most people interested in diversifying because they're each professionally managed to achieve specific objectives. They're also a lot more affordable and convenient than individual securities, which may require more money and knowledge than novice investors can bring to the table.

With the help of Fiscal Agents independent financial adviser, you can eliminate any guesswork. Use the Cornerstone Planning investment program and the company's sophisticated strategic asset allocation software to recommend the exact combination of funds that make up just the right diversified portfolio mix for you -- based on your age, your goals, your needs, and your attitudes toward risk. That's exactly what a good asset mix is all about.