Looking at my RRSP portfolio lately, I’ve noticed something that many investors are experiencing: many of the holdings are sitting at seemingly high valuations. The portfolio has grown significantly, and with that growth comes the familiar question - what should I do now?
The Temptation to Time the Market
When you see your portfolio at or near all-time highs, the natural instinct is to think about taking profits. After all, shouldn’t we “buy low and sell high”? But for long-term investors in registered accounts like RRSPs, the decision isn’t always straightforward.
Two Main Approaches
Option 1: Stay Fully Invested
The simplest approach is to stay the course and remain fully invested. This strategy has several advantages:
- Compounding continues: Your money keeps working for you in the market
- No timing risk: You don’t have to guess when to get back in
- Tax efficiency: In an RRSP, you’re not worrying about capital gains taxes anyway
- Historical precedent: Time in the market has consistently beaten timing the market
The downside? If a correction comes, you’ll ride it down. But for long-term investors with a horizon measured in decades, this is often the right call.
Option 2: The Cash Wedge Strategy
The alternative is to implement a “cash wedge” - keeping a portion of your portfolio in cash or cash-equivalents. This provides:
- Dry powder: Capital available to deploy if markets correct
- Psychological comfort: Knowing you have cash can reduce anxiety during volatility
- Flexibility: Ability to take advantage of opportunities as they arise
In Canada, two excellent options for this cash wedge are:
- CASH.TO: A high-interest savings ETF that currently yields competitive rates
- CBIL.TO: Another cash ETF option for parking capital safely, based on Government of Canada bonds
Both of these provide liquidity and some yield while protecting your principal.
My Current Approach
For my RRSP, I’m leaning toward maintaining a modest cash wedge using CASH.TO or CBIL.TO. This isn’t about trying to time the market perfectly - it’s about having options and peace of mind.
The key is that this cash wedge shouldn’t be too large. Maybe 5-10% of the portfolio. Enough to feel prepared, but not so much that you’re significantly sacrificing long-term returns. With the current high valuation of the market, there’s is nothing really on sale right now, so the best way to start is to no re-invest the dividends and let the cash wedge build up over time. This is only the in the RRSP as you are looking to withdraw from it in the near future.
The Long-Term Perspective
Ultimately, the right answer depends on your individual circumstances:
- Your time horizon to retirement
- Your risk tolerance
- Your need for liquidity
- Your overall financial picture
For most long-term investors, the mistake isn’t staying invested when valuations seem high - it’s getting out and then struggling to get back in. Markets can remain irrational longer than you can remain solvent.
Conclusion
High portfolio valuations are a “good problem” to have - it means your investments have grown. Whether you choose to stay fully invested or implement a cash wedge strategy, the most important thing is having a plan and sticking to it.
For me, a small cash wedge in CASH.TO or CBIL.TO provides the right balance of opportunity and peace of mind. But the core of the strategy remains the same: stay invested for the long term, and let time and compounding do the heavy lifting.
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