Can You Lose Money in an RRSP?

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Are you considering opening an RRSP but a little nervous about losing money? 

If so, you are not alone. Many first time investors open up an RRSP without really understanding how they work which leads to anxiousness about the thought of losing money.

So here’s the thing,

As long as you don’t borrow money to invest in your RRSP, you will never be indebted to your account. However, if your RRSPs overall return on investment is negative, then you will have less money in your account then you put in.

But remember, an RRSP isn’t an investment in itself, but more like a bucket to hold eligible investments within. If you don’t yet have a RRSP open, I’d look into Wealthsimple. Wealthsimple is a Canadian company, the sign up process is completely free, it takes literally a matter of minutes and you can start investing with quite literally $1.

Want to Open an RRSP? Try Wealthsimple Today and Earn $25 with your Sign-up.

Now let’s dive in deep and talk about the main question at hand here, can you lose money in a RRSP? ‘

Can You Lose Money in an RRSP?

So as I just mentioned, as long as you don’t borrow to invest in your RRSP, you won’t have a negative balance in your account, but you could have less money in your account then you put in if your overall return on investment is negative.

For example, let’s say Adam invests $1,000 of his own money into an RRSP. Unfortunately, Adam invests in worthless penny stocks that don’t do too well and they drop by 99%. Well even though this sucks, and Adam should hire a financial advisor, he isn’t indebted to anyone or any company, he’s just down $990 on his investments. 

So yes, Adam lost his own money in his RRSP in this situation. Lesson learned, don’t invest in penny stocks, move on.

Now using Robert as an example, if Robert borrows $1,000 to invest in his RRSP and also decides to invest in the same cheap, worthless penny stocks that Adam did, then Robert will also lose $990 of his $1000 investment. 

Unlike Adam though, Robert borrowed his RRSP investment funds which means he is indebted to whomever he borrowed the money off. Adam on the other hand just lost his own money but can move on with his life without any debt owed.

Does that make sense? If you are still a little unsure, just decide right here and now you won’t borrow any money to invest in your RRSP. That way if you do lose money from your RRSP investments, you won’t be indebted to anyone.

But to be honest, I think you should also decide not to lose money in your RRSP, even with your own money. What would be the point of that?

In the next section I am going to talk about five tips you can use to help you avoid losing money while investing in your RRSP.

Related Financial Geek Article: The Pros and Cons of an RRSP [5 of Each]

5 Tips To Avoid Losing Money in Your RRSP

1. Invest with Less Risk

One way to avoid losing money in your RRSP is to lower your investment risk. Some ways to do this are to invest less in stocks and more in things like GICs, Bonds, and Money Market Funds.

While you’ll still make a return on your investments with these assets, it likely won’t be as much as you would with equities over the long term.

To learn more about some of these safer investments, check out a similar article I wrote titled Can You Lose Money in an TFSA where I talk more about each of these investments. 

2. Avoid Selling Off Your Investments Too Early

So this is a really important point here. You’ll only actually lose money in your RRSP once you sell your investments for a loss. 

Even in the example I give with Robert and Adam, that is only assuming they sold their investments when they were down 99%. 

If they didn’t sell the investments, they would still be down 99% on their investments, but it would be an unrealized loss. Which means, if the stock goes back up, well then the investor would start earning money (or reducing the loss).

A stock is realized when it is eventually sold. Unrealized losses or gains are also referred to as paper profits or losses.

So all this to say, if you invest in securities in your RRSP that you think will be solid investments over time, don’t just sell them because they’re in a dip. All stocks fluctuate, it’s part of the game.

Remember, your RRSP is meant for long term investments and you won’t be using this money until you retire. So don’t panic and sell off too early, that’ll make you actually lose money in RRSP, the one thing you don’t want to have happen.

3. Invest Your Money with an Established Financial Institution 

If you are new to investing and really want to avoid losing money in your RRSP, I’d avoid making all your investment decisions yourself.

Obviously there are some things you’ll decide for yourself, like how much to invest and what risk levels you are comfortable investing with, but when it comes to actually putting money in the market and choosing investments, think about working with a financial institution.

I personally invest in an RRSP with Wealthsimple Invest. I basically just set my risk level from a scale of 1-10, automatically deposit a certain amount of money into my account each month and let them do the rest. 

Below is an image of my actual RRSP account and where I adjust my risk level if needed. Right now my risk level is 8/10 which means Wealthsimple invests 80% of my funds in equity and the other 20% in fixed income and gold.

If you want to learn more about the benefits of opening an RRSP with Wealthsimple and how to get started, check out my article here.

4. Diversify Your Investments

Diversification might sound like a complicated financial term, but it’s really not. All this means is don’t put all your eggs in one basket.

In this case of investing in an RRSP, don’t invest in only one stock within your RRSP. Diversify your portfolio so that if some investments go down others will go up which limits your potential downside. 

Now I realize this is a very simplistic explanation of diversification, but as I’ve said on this blog before, I don’t give direct financial advice as there are no guarantees in investing.

To learn more about how to diversify within your RRSP and how it helps prevent you losing money, speak with a financial professional. 

5. Don’t Invest with Borrowed Money

And lastly, as I mentioned at the beginning, don’t invest borrowed money in your RRSP.

One thing we know for sure about investing is that there are no guarantees. While there are things you can do to minimize the chances of losing money, there are no 100% guarantees. 

So of course you can do as you please, but I sleep better at night knowing that if the worst comes to worst, I may  (not likely over time if you make smart investments) lose some of my own money, but I won’t be indebted to anyone else.

What to Do If You Lose Money in Your RRSP?

If you do end up losing money from your RRSP, the first thing you want to do is just not panic.

Remember, you only really lose money when you sell your assets. So if you bought a stock in your RRSP at $1,000 and it’s now $950, well you’ve only lost $50 on paper, which means if it went up $100 in the next two weeks, well then you’d be up $50. 

As previously mentioned, stocks always fluctuate, so if you can’t handle that, lower risk investments like I talked about earlier may be a better option for you.

But if you’ve invested in solid companies that you think will succeed over time, don’t panic and sell when the price dips. 

Your RRSP is meant for long term investing, so it can afford to take some hits along the way, the main thing you want to ensure is that overtime your portfolio is trending up and to the right.

For example, look at Facebook’s stock chart here below. As you’ll be able to see, even though Facebook is a solid company, and in my opinion a good investment, the sun hasn’t always been shining on their stock price. But in general, over time the stock is moving in the right direction. Up and to the right.

With that said though, it’s not always a good idea to hold onto your investments when you’re losing money on them. If you re-evaluate your investments and believe what you’ve invested in is no longer a good long term investment for you and your RRSP, then it may be time to cut your losses, sell your holdings in that company or fund and then move on.

But at all costs, try and avoid losing money when you invest. 

“Rule #1 of investing is to never lose money. Rule #2 of investing is to never forget rule #1”

— Warren Buffett

So if you’ve lost money in your RRSP, first don’t panic, secondly, re-evaluate your investments and determine if your investments are just in a short term dip, or if you’ve actually made bad investment choices that will likely never make you money. 

If it’s the ladder, I would personally sell them, and then speak with a financial expert about how to avoid doing that again in the future.

Conclusion

In summary, yes you can lose money in your RRSP. However, as long as the money you put in your account was yours to begin with, you won’t owe anyone money by losing money in your RRSP, but if your portfolio’s overall return on investment is negative then you will have less money in your RRSP than you put in.

With that said, I never recommend borrowing money to invest with, regardless of whether it was in an RRSP or not. I just don’t think it’s a good idea.  

You can never 100% guarantee if an investment is going to make you money or not, but one thing you can guarantee is that you’ll have to pay back any money you borrowed. So remember that. 

If you’re really risk averse, invest a smaller percentage of your money into equities like stocks and index funds and invest more into fixed income securities like GICs and bonds.

Related Financial Geek Article: The Pros and Cons of Investing in Bonds.

Lastly, if you do happen to lose a bit of money in your RRSP, remember it’s only an actual loss when you sell at a lower price than what you bought it for. So don’t panic and do anything too quickly that can’t be undone (selling). 

Instead, just take a step back and reevaluate your investments and if you haven’t already, consider speaking with a financial expert. 

Open up an RRSP with Wealthsimple in 30 minutes ($25 Bonus)

That’s it for me! Thanks for reading, and as always, I hope you learned something here today.

Geek, out.