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Retirement Planning

A Portfolio Strategy for your RRSP

Every investor should have an RRSP portfolio strategy. Not only does it work to your advantage in total return over time, but it also makes a portfolio easier to maintain and monitor.

One of the most popular portfolio designs for an RRSP account is a five-year 'AAA' rated stripped coupon ladder coupled with an equity vehicle such as an index unit or mutual fund.

Here's how it works: investors purchase a series of one to five-year laddered maturity Canada stripped coupons (a popular class of securities that feature maintenance-free compounding) of a total par value equal to the cash investment, guaranteeing the return of principal. Since this type of debt instrument trades on a discount to maturity value basis, there will be a cash sum remaining, which is invested into an equity vehicle such as an index unit or mutual fund.

Each year, when a coupon matures, an equivalent face value five-year Canada strip is purchased with the proceeds, and the remaining cash is used to buy more of the equity vehicle. The portfolio is designed with an eye to guaranteeing the return of principal, and therefore only stripped coupons of the highest quality are used. The maturities in the portfolio are laddered so that only 20 per cent matures in any given year, reducing the risk of having to rollover and re-invest all of your funds at a time of low rates.

This "neutral" interest rate strategy reduces your need to make the "right" market call on when to, or when not to, place your monies. The index, or mutual fund component, for equity market participation takes the guesswork out of timing the equity market. A modest cash investment of $50,000 is recommended to start, while smaller amounts can be used to start a two or three-year ladder, which can be added to with annual RRSP contributions.

The information contained herein is considered accurate at the time of posting. CIBC and CIBC World Markets Inc. reserve the right to change any of it without prior notice. It is for general information purposes only.

Clients are advised to seek advice regarding their particular circumstances from their personal tax advisors.

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