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Rob Carrick

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The Long Haul

Rob Carrick

 

OTTAWA (GlobeinvestorGOLD) — On the list of things to buy when you’re in your 20s and just starting work, RRSPs are about as appealling as a membership in the neighborhood shuffleboard club. It’s understandable — registered retirement savings plans are all about eventual satisfaction, and being in your 20s is all about immediate gratification.

Still, RRSP investing in your 20s makes sense in a variety of ways. If you still hate the idea, then it might help to know that you should invest aggressively in an RRSP when you’re young. No guaranteed investment certificates allowed.

You could easily open a brokerage account somewhere and start speculating on stocks when you’re young, but investing through an RRSP makes a lot more sense. Money invested when you’re 25 can compound for decades until you retire. If you contribute $1,000 and let it sit in an RRSP for 40 years with an average annual return of 7 per cent, you’ll end up with $14,974; invest $2,000 for 20 years at 7 per cent and you end up with $7,739. Another advantage of starting an RRSP early is that you’ll have a good base of retirement savings when you get to the years where having kids, buying a house and other commitments will make demands on your income. If you’ve got a good head start on your RRSP, you can taper back your contributions temporarily and direct money elsewhere.

Aggressive investing is your goal, not stupid investing. So no huge bets on technology or biotech funds, and no penny stocks. Instead, think about building a core for your portfolio with a Canadian equity fund and then adding a global equity fund and a specialty fund to add a little spark. A bond fund would be a good idea, too, just to offer some protection in years when the stock markets tank. But if you want to be really aggressive, then forget the bonds.

People in their 20s have license to invest aggressively because they’re so young. Just as the many decades until retirement provide a long period for compound growth in a portfolio, so do they also create the optimum situation for profiting in the stock market. The volatility inherent in stocks is a concern as you get close to your retirement date, but not when you’re 40 years away.

Finding quality funds to buy when you’re in your 20s can be somewhat tricky because you won’t have much to invest upfront and you likely won’t be able to afford to investment any great sums on a monthly basis. That means you’ll likely have to forego the excellent offerings from companies such as Saxon, Chou Funds and Phillips, Hager & North, which all require you to have $5,000 to $20,000 to start an account. Your alternatives are mass-market fund companies, either those owned by the banks or those whose products are available through financial planning firms, brokerage houses and do-it-yourself on-line brokers.

Remember when picking funds for yourself or discussing things with an adviser that you’re neither seeking a conservative fund nor a reckless one. You want a demonstrated ability over at least five years and preferably 10 to deliver above-average returns without alternating boom-bust cycles. Examples of funds that have done this include and can be bought for as little as $500 include:

A 5- to 10-per-cent weighting in a specialty fund is just fine when you’re in your 20s and you can go a little heavier if you can accept the downside risk. Tech funds are a possibility, as are health care, Far East and emerging market funds. Don’t fall in love with these fringe fund categories, though. While they can deliver huge double-digit gains in good years, it’s not impossible for them to lose something like half their value in a bad year. If that happens to you, then you’ve lost the advantage of investing in your 20s.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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