Investing

Fund selection for employer RRSP

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  • Mar 9th, 2019 11:36 am
[OP]
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Jan 19, 2017
290 posts
83 upvotes

Fund selection for employer RRSP

I have a question about setting up my RRSP through my employer. My employer uses Great-West Life, and we have a range of funds (e.g., US Equity Index Fund or Canadian Dividend Fund, which are all combinations of different type of funds) to choose from to be used for our deductions. The form I'm filling out to initiate the process has a space for us to indicate which funds we'd like to use. I'd like to know whether it's best to use only a few (say, 2-3) or a lot more (say, 10-15) different funds.
My impression is that I could use a mix of low-risk and high-risk funds to make a super-portfolio (each individual fund is itself a portfolio of smaller funds, as I mentioned above) to balance the risk and return of each fund. However, doing that means I won't be contributing large chunks to each one, so at the end of a year, each fund will have only a small amount of money in it, thereby giving me only small returns.
What do you guys suggest? Should I pick only 2 or 3 funds that I feel comfortable with and go with those? Or should I pick many and hope for the best?
Thanks!
7 replies
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Feb 13, 2019
111 posts
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Edmonton, AB
If you want to diversify then spreading across more funds would accomplish that. Alternatively you can diversity your broader portfolio.

Be aware of the MERs. My employer's plan with GWL has really high MERs (1-2%), so I periodically transfer the funds to a different institution (only use the plan for the employer match portion). My previous employer's plan with Manulife had MERs in the 0.2-0.8% range which were a lot more palatable.
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[OP]
Member
Jan 19, 2017
290 posts
83 upvotes
rolenEDM wrote:
Mar 5th, 2019 8:54 pm
If you want to diversify then spreading across more funds would accomplish that. Alternatively you can diversity your broader portfolio.

Be aware of the MERs. My employer's plan with GWL has really high MERs (1-2%), so I periodically transfer the funds to a different institution (only use the plan for the employer match portion). My previous employer's plan with Manulife had MERs in the 0.2-0.8% range which were a lot more palatable.
thanks! i've checked the MERs, and for us, they're pretty low (around 0.5% or lower). i don't quite understand your second sentence, "Alternatively you can diversity your broader portfolio," and how it related to the first one. most of the funds i've currently selected are pretty diverse themselves. my original question was whether it would it's preferable to select a few diverse funds vs many diverse funds. i know the answer depends on the return/risk of the individual diverse funds, so i think i am looking for anecdotal answers.
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Feb 13, 2019
111 posts
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Edmonton, AB
For example you could have all bonds in your employer RRSP and invest elsewhere in your other investments for overall diversification.
Older generations literally have no biological purpose to exist other than to help the younger generation.
I am the proud inventor of the Rolen Plan for early retirement.
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Feb 1, 2012
1021 posts
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Thunder Bay, ON
You should spend a bit of time understanding asset classes and portfolio design before choosing funds. Your available funds probably include equities (stocks) and fixed income (bonds). Equities can be Canada, US and global, and may have some segment funds like small cap, dividend, emerging market, etc. Bonds can be broad market, or subdivided into corporate, government, investment grade, high yield, domestic & foreign.

What would you expect to gain by having 10-15 funds instead of 2 or 3? If 2 or 3 funds would cover the entire global equity market, what extra would you expect to get from holding more funds? You could concentrate your choices on the US market or emerging markets, for example, but to do that you should have a theory on why those regions should outperform in the future and data to back up your theory. Impossible really since there is a lot of guesswork on predicting the future. If you can get broad diversification with 2 or 3 funds, then buying 10-15 funds ls like buying a Big Mac meal, then buying an extra Big Mac, fries and drink, for "extra diversification". It's not more diversification, just more of the same in separate pieces.

Look to see if there are simple broad based funds like Canadian equity, US equity, global equity and fixed income / bond.

Here are some good links on how to design a basic portfolio.

Finiki, the Canadian Financial Wiki is a great Canadian personal financial resource:
https://www.finiki.org/wiki/Portfolio_d ... nstruction
https://www.finiki.org/wiki/Simple_index_portfolios

Canadian Couch Potato has great info on simple low-cost portfolios:
https://canadiancouchpotato.com/model-portfolios/

Your GWL funds won't be exactly the same as any of the ones in the links above, but you may be able to build a similar simple portfolio. Then look at the other available funds and see if you think you can add more value by including them. Albert Einstein is reported to have said "Everything Should Be Made as Simple as Possible, But Not Simpler"
Invest your time actively and your money passively.
[OP]
Member
Jan 19, 2017
290 posts
83 upvotes
Deepwater wrote:
Mar 6th, 2019 4:11 pm
You should spend a bit of time understanding asset classes and portfolio design before choosing funds. Your available funds probably include equities (stocks) and fixed income (bonds). Equities can be Canada, US and global, and may have some segment funds like small cap, dividend, emerging market, etc. Bonds can be broad market, or subdivided into corporate, government, investment grade, high yield, domestic & foreign.

What would you expect to gain by having 10-15 funds instead of 2 or 3? If 2 or 3 funds would cover the entire global equity market, what extra would you expect to get from holding more funds? You could concentrate your choices on the US market or emerging markets, for example, but to do that you should have a theory on why those regions should outperform in the future and data to back up your theory. Impossible really since there is a lot of guesswork on predicting the future. If you can get broad diversification with 2 or 3 funds, then buying 10-15 funds ls like buying a Big Mac meal, then buying an extra Big Mac, fries and drink, for "extra diversification". It's not more diversification, just more of the same in separate pieces.

Look to see if there are simple broad based funds like Canadian equity, US equity, global equity and fixed income / bond.

Here are some good links on how to design a basic portfolio.

Finiki, the Canadian Financial Wiki is a great Canadian personal financial resource:
https://www.finiki.org/wiki/Portfolio_d ... nstruction
https://www.finiki.org/wiki/Simple_index_portfolios

Canadian Couch Potato has great info on simple low-cost portfolios:
https://canadiancouchpotato.com/model-portfolios/

Your GWL funds won't be exactly the same as any of the ones in the links above, but you may be able to build a similar simple portfolio. Then look at the other available funds and see if you think you can add more value by including them. Albert Einstein is reported to have said "Everything Should Be Made as Simple as Possible, But Not Simpler"
thanks a lot for the information, especially the finiki links. as you have guessed (correctly), i am not all-knowledgeable in investing. i have been reading about it on and off for about a year or so, but i'm still a novice, and i am not 100% familiar with all the quirks.

to answer you question to me RE: 2/3 funds vs 10/15 funds: i am a couple of decades from retiring, so my risk tolerance is not low...i'm comfortable with medium-to-high-ish(!) risk at the moment, but not any higher (if that makes any sense). however, some funds have low return and low risk, whereas some funds have higher returns but come with higher risk, and they are also all diverse funds. my question comes from the premise that including the low-return/low-risk AND high-return/high-risk funds will balance things out in the long term, and would benefit me in that the low-risk fund will act as a safety net for when the high-risk fund is underperforming. i am not trying to time the market (that is nonsense...i know enough about stochastic processes to know that such an endeavor would be futile). let me give you an example: in the GWL ecosystem, i have access to Balanced Profile Fund (PSG) with low-risk/low-return and to Science & Technology Fund (London Capital) with high-risk/high-return; i can think of two to three other pairs of funds that have similar characteristics. basically, my thinking is that even though a fund might be diverse in its geographical/composition/industry scope, a single fund is definitely not diverse in its return/risk potential. so, to balance that aspect out as well, i could mix high-risk/high-return funds with low-risk/low-return ones. does that make sense?
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Feb 1, 2012
1021 posts
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Thunder Bay, ON
You want a portfolio with overall medium to high return, so you plan to have part of your portfolio geared to low return, augmented by some segment funds like Science & Tech that hopefully will have high return, when combined give the return you desire. Most of the companies in the Science & Technology fund are also in broad based funds like something tracking the S&P500 or the total US market.

High risk segments can have high return, but tend to be volatile, and can also have low returns for long time periods. How would you feel if some segment fund you bought dropped 40% and took a year, or 5 years to recover? Would you hold it or cut your losses and look for something better? Markets and segments can move in very long cycles. People that bought gold in 1980 waited to 2007 to get their money back. People that bought gold in 2011 are still looking at a 25% loss. NASDAQ which follows tech stocks peaked in 2000 then crashed and did not recover for 15 years. The FANG stocks are all significantly below the peaks they hit last year.

Instead you could hold a portfolio with 80% globally diversified stocks and 20% bonds that would result in the medium to high risk you want without chasing segments that may or may not give good returns.

I can see the logic that leads to your suggestion, but I'm not sure it works so well in real life:
- How would you pick the segments to focus on?
- Segments can be very volatile, and sometimes go through long periods of low returns. Would you have the conviction to not sell?
- Actively managed funds tend to have higher costs, that create a large performance headwind that is hard to overcome
- more complex portfolios are harder to track and take more time to research manage

IMO it is likely a losing strategy, but has a small chance of doing well. As long as you keep the high risk component to a small percent you are at least limiting the downside risk.

Here is a good video on active management vs. indexing.
Invest your time actively and your money passively.

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