Investor Toolkit: You can strengthen your RRSP when you take money out

Retirement Planning

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “If you’re going to dip into your RRSP to raise cash, you can make it a positive transaction that actually strengthens the portfolio within your RRSP.”

Two weeks ago, we wrote about how to achieve a double win—and avoid a double loss—in Registered Retirement Savings Plans (RRSPs). View the post here. Last week, we discussed making the right retirement calculations. View the post here.

Today we discuss another aspect of RRSP investing: the best approach for investors to take when they feel the need to “raid” their RRSPs in order to raise cash.

We have three specific suggestions on what to sell first when you raise cash from your RRSP:

Leveraged investments inflate losses just as much as profits

Sell leveraged investments. This includes heavily indebted companies as well as warrants, options, the capital shares of split-share companies, funds that invest in futures contracts, and so on. Leverage magnifies your profits when prices rise, but it works two ways — it also magnifies losses when prices fall.

It’s generally a good idea to limit your leverage, but especially at times when you need to take money out of your RRSP.

Sell juniors. That is, sell stocks of companies that have not yet managed to establish a history of earnings. They are a poor choice in your RRSP anyway. That’s because juniors expose you to a high risk of loss.

If you lose money in an RRSP, you lose the opportunity to make your money grow on a tax-deferred basis, and you can’t use your loss to offset a taxable capital gain.


Trusting your financial advisor

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Sell foreign holdings. Foreign investments come with more risks than Canadian investments. These include currency fluctuations, political upheavals, deep-seated corruption and so on. The further you are from a market or an investment, the less likely you are to spot these problems ahead of time.

It pays to be particularly choosy about foreign investments you do include in your portfolio. Our favorite ‘foreign’ investments are shares of North America-based multinationals.

Our investment advice: By selling your riskiest investments, you not only raise the cash you need. You also leave your RRSP and the rest of your portfolio in a stronger safer position than it was before the sales.

Coming up Next

Tomorrow in our U.S. Stock Picks we look at another of our successful spinoff stocks.

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