I notice Larry Macdonald is tackling the age-old question of where to put cash into work. This would be cash that is earmarked for an RRSP and/or TFSA contribution.
The sensible answer is that you don’t have to contribute and instead concentrate on debt reduction. Many people have a mortgage accruing interest at 4%, and assuming your marginal tax rate is 30%, it would amount to an equivalent pre-tax investment at 5.7%, not bad on what amounts to a risk-free return.
If you are fortunate enough to have no debts to pay off, then the question becomes more difficult to answer.
I would agree with the sentiment that the marketplace feels “frothy”, albeit equities are likely poised for further gains early this year.
The worst decision somebody can make is to contribute cash and put it immediately to work in an investment without regard to the valuation of the investment. For example, dumping the money into an ETF (which is what most casual investors will do) is unlikely to produce a market-beating return unless you can explicitly justify why the ETF components are undervalued.
This question is amplified for myself, mainly because I have been on a liquidation spree at the beginning of this year. It hurts to see cash earning 2%, but it would hurt even more to see that cash earn -10% on a snap decision investment. All I can do at present is pile stocks up in my research queue, and be patient for valuations to correct themselves or to wait for a volatility shock in the marketplace.
It is for this reason, high levels of cash, that I am not terribly optimistic about my 2011 performance.
Thanks for the link Sacha. Someone left a comment on Canadian Capitalist’s blog that another way to deploy cash in a frothy environment is to invest in yourself — i.e. enroll for some training, courses etc