Investing inside your RRSP or TFSA: the main choices
An RRSP or TFSA is a container, not an investment. What you put inside it – cash, GICs, bonds, stocks or funds – decides how much it can grow and how much it can drop along the way.
The main choices
- High-interest savings
- Cash that earns interest and can be taken out at any time. Safe and simple, but over long periods the return often barely keeps up with inflation.
- GICs (guaranteed investment certificates)
- You lend money to a bank or credit union for a fixed term, usually one to five years, at a set rate. Your capital and interest are guaranteed by the issuer, but money is usually locked in until the term ends.
- Bonds
- Loans to governments or companies that pay regular interest. Bond prices move when interest rates change, so they can fall in value before maturity, but they usually swing far less than stocks.
- Stocks (shares)
- Part-ownership of a company. Over decades, stocks have usually earned more than bonds or cash, but prices can fall sharply in any given year.
- Mutual funds and ETFs
- Baskets of many stocks and/or bonds managed for you. One fund can give you hundreds of holdings. Costs vary a lot – see mutual funds and ETFs.
- Robo-advisors
- Online services that ask you questions, then put you in a ready-made portfolio of low-cost ETFs and rebalance it for you, for an annual fee on top of the ETF costs.
Match risk to your time horizon
The key question is when you will need the money. Money for a home purchase in two years should not be in stocks, because a 30% drop the year before you buy could wreck the plan. Money for retirement in 30 years can ride out several bad years, so most long-term savers hold a large share in stocks.
A common approach is to mix stocks and bonds (your asset allocation) and shift slowly toward bonds and cash as the date you need the money gets closer. A "balanced" fund that holds both, or a target-date fund that shifts for you, does this in a single product.
Rule of thumb. Money you need within about five years belongs mostly in savings, GICs or short-term bonds. Money you won't touch for 10 years or more can take more stock-market risk – if you can sit through the drops without selling.
Fees matter more than most people think
A fund that costs 2% a year takes about a third of a 6% gross return. Over 25 years that can shrink your final balance by roughly a third compared with a fund that costs 0.25%. The worked example is on the mutual funds page, and compounding shows why small differences add up.
Which account first?
The investments are the same in every registered account; the tax rules differ. See TFSA, FHSA and RESP for RRSP vs TFSA vs FHSA, and RRSP, TFSA or FHSA? if you are not sure an RRSP suits you.
Pages in this section
- Mutual funds & ETFsHow mutual funds and ETFs work, what the MER and trailing commissions are, the 2022 bans on DSCs and discount-broker trailers, and what a 2% fee costs over 25 years.
- Evaluating a fundHow to judge a mutual fund or ETF: read the Fund Facts, compare with a benchmark, check fees, risk, holdings overlap and manager tenure, and spot red flags.
- CompoundingHow compound growth works, the rule of 72, and a worked example: $200 a month at 5% from age 25 grows to about $305,000 by 65, versus $166,000 starting at 35.
- Dollar-cost averagingHow investing the same amount every month works, a worked example of average cost below average price, Vanguard's lump sum vs DCA findings, and automatic contributions.
- SRI & ESG investingWhat SRI, ESG and impact investing mean, how screening and engagement work, how to spot greenwashing, and what Canadian rules say about ESG funds and green claims.
- GlossaryPlain-English definitions of 60 Canadian investing and retirement terms, from adjusted cost base and annuity to YMPE, with links to the pages that explain each in detail.