The Registered Disability Savings Plan (RDSP) is the most generous registered account available to Canadian with disabilities, and it is vital to empowering financial independence for the beneficiary. In addition to opening the account, the account holder may be responsible for selecting investments inside the RDSP which could drastically alter the value of the account once the beneficiary turns 60 and is required to begin withdrawals via Lifetime Disability Assistance Payments (LDAPs). It is therefore recommended that RDSP stakeholders learn the fundamentals of investing to better understand the trade-off between risk and returns.
In the investing world, the word risk often carries a negative connotation. However, risk is an absolute necessity for wealth creation. Without the willingness to accept risk, an investor guarantees losing money to inflation and forfeits growth necessary for long term financial success. If the money doesn’t grow at a rate higher than inflation, it likely won’t be enough to cover the increased costs of care years from now. The goal of a good investor is not to eliminate risk, but to manage it through diversification, a sensible time horizon, and staying disciplined to their strategy when markets become volatile.
In general, investments that are considered more risky will have higher expected returns.
Diversification
It is the idea of not putting all of your eggs into one basket. It has also been described by Harry Markowitz as the only “free lunch” because it allows investors to reduce risk without sacrificing future expected returns. Diversification means spreading money across a variety of asset classes, companies, industries, and geographic regions, so that financial success or failure isn’t tied to the performance of a single entity.
Discipline aka emotional temperament
Diversification lowers volatility, which are the dramatic ups and downs of an account balance. A disciplined investor will stay the course and ignore the short-term fluctuations with respect to the stock market. Undisciplined investors have historically sold during down markets and conversely bought during market rallies due to greed, excitement, or Fear Of Missing Out (FOMO). Countless studies show that investors that make reactive and emotionally driven decisions under perform the market.
Time Horizon
It is the total length of time an investor expects to hold the assets before withdrawing. Determining time horizon is crucial to selecting an appropriate asset allocation that realizes the beneficiary’s future financial needs.
The power of compounding returns
While the government grants and bonds are generous, the true power of an RDSP lies in the exponential growth of compounding returns. By embracing market volatility and sticking to a disciplined and diversified investment strategy, contributions can grow substantially to secure financial goals.