Posted by Tim Stobbs on April 25, 2007
During the 100th post contest I got a great series of ideas for topics from the readers, one I’ve been thinking about from Cardero was how much Canadian equities exposure should we have in an RRSP?
Prior to 2005 this was a simple question. We had to have 70% Canadian content in our RRSP account to not exceed the foreign content limit. Now with the flood gates wide open you have have up to 100% in foreign content, which provides Canadians a significant opportunity to invest outside of Canada. This is a good thing after all Canada only has 0.5% of the world population and something like 3% of the world’s market (I can’t seem to find that statistic this morning).
The issue to investing in foreign content is your not only investing in bigger markets, but also in foreign currencies. You end exposed to more than you plan on which is fine during a long time frame, but somewhat problematic if you need the money any time soon. So with all this in mind here is what I suggest people do at different time frames.
Over 20 years to retirement: Keep you Canadian equity content to no more than 33% of your portfolio. You have time you don’t keep too much money in Canadian equities.
Five years or less to retirement: Now should start to reduce your equities in your portfolio and covert them to more stable fixed income. Also at this time you will want to pull back a bit from foreign markets. Depending on what you want for a fixed income/equities balance, for example 60% fixed and 40% equity, you want about half your equity in Canada. So in this case 20%, but if you want a 70/30 split you would reduce your Canadian content to 15%.
Less than 20 years and more than 5 years: Now your into a bit more of personal risk territory of what you can handle. In my case I’m holding around 25 to 30% in Canadian equities, but I plan on scaling that back as time goes on.
The exception to all of the above is if you planning on a Derek Foster style retirement where you live off of just dividends. In this case you want a lot of Canadian content to reduce your tax load to near zero, since low income Canadians don’t pay tax on Canadian dividend income.
That’s my take on the question. What do you think? I would love to see what other people have been doing and their opinions.