A TFSA strategy built with stop-loss orders - MoneySense

How I built a $34,000 TFSA at the age of 23

Me & My TFSA: Learning the upside of stop-loss orders

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Morgan Reynolds

AGE: 23
PLACE: Kingston, Ont.
TFSA TOTAL: $34,431
STRATEGY: Aggressive growth with equities

Morgan Reynolds, 23, studied business marketing at Fanshawe College in London, Ont., and sports and entertainment sales and marketing at Loyalist College in Belleville, Ont. That allowed him to get an internship position with the Ottawa Senators of the NHL, and once that ended, Morgan moved back to Kingston, Ont. and got a job in the hospitality industry. “Since I was living at home, I was able to pay off my $15,000 student debt in six months, while it was still on its grace period,” says Morgan.

“That’s when I looked into DIY investing because I truly believe no one will care for my money as much as I will,” says Morgan. After some extensive research, Morgan started actively investing a year ago through his TD Direct Investing account and, despite being in the second largest bull market in history that was already due for a market correction, he says he “still liked the idea of stocks rather than mutual funds, GICs, bonds, etc. because I have time on my side and I want to see my TFSA grow aggressively.”

So in December of 2016, Morgan contributed $6,000 to his TFSA, exceeding the maximum contribution room for that year but he had plenty of accumulated room over the years from not contributing. Year-to-date, Morgan has contributed $31,718 total to his TFSA, with a gain of $2,704 (8.53%). “Stocks are one of the greatest wealth building instruments I now and at just 23, I can be aggressive. I originally had stocks picked out that have done tremendously well, such as Canopy Growth and Dollarama, but you live and learn.”

Morgan’s TFSA holdings

That’s because part of Morgan’s investment strategy involves using stop-loss orders to reduce risk. But it’s a strategy that has also caused him to lose out on some big gains. A stop-loss limit order is an order you put in to buy or sell a stock automatically once it reaches a certain price. It’s designed to limit an investor’s losses on particular stocks. So for instance, setting a stop loss order at 10% below the price you bought the stock at limits your losses to 10% if the stock starts plummeting.

Morgan first tried this strategy with Canopy Growth, the marijuana company. He bought his original shares in January of 2017 at a little over $10 each and then put in a stop-loss order at $10. As soon as it hit his stop-loss price of $10, Morgan sold the shares, but they then proceeded to skyrocket to $20 a share within a few short weeks. The damage? Morgan lost out on $8,000 in potential gains on his Canopy shares but even though that hurt, he doesn’t like to think like that. “I still have my principal and that’s part of the stop-loss strategy,” says Morgan. “I’m living and learning, and making a few mistakes is okay if it helps me become a better investor.”

Morgan owns several shares of Alimentation Couche-Tard (TSX:ATD.A), a chain of convenience stores but his largest stock positions are shares in Storage Vault (TSX.V: SVI), which owns, rents and operates self-storage and portable storage space, and Enbridge (TSX:ENB), a gas distribution company. Those two company stocks make up two-thirds of Morgans portfolio and he’s sticking with them. “I don’t plan to trade those,” says Morgan. “Enbridge just increased its dividend 10%. As for StorageVault, he bought some shares earlier this year after watching a documentary. It’s a pure play on the TSX-Venture index and he plans to hold it long-term because he thinks it will eventually be listed on the Toronto Stock Exchange.”

As for his other two stocks—Shopify and Pioneer Technology—Morgan says he added those to his TFSA for different reasons. “My Shopify shares are purely a momentum trade,” says Morgan. “Whereas Pioneer Technology is a pure value play since the company makes  energy-smart products.”

The truth is that Morgan enjoys learning about different strategies and feels he is young enough to experiment a bit at this stage of his life. “I like reading about strategies and doing them all,” says Morgan. “I’m in a little bit of everything right now. Down the road, when I decide what type of investor I am, I’ll be more strategic, but right now, I’m just trying to figure it all out still.”

In fact, in the last month, Morgan has started his own personal finance blog called Lets’ Talk Money Today and it’s humming along, gaining more readers every day. As for the future, he has no plans for the TFSA money. “My girlfriend asked me what I wanted to do with my TFSA money last night and I told her that I was really just very frugal and wanted my money to grow. If the stock market crashed, or I lose interest in investing, I may buy a house with the money. But the important thing to me is taking control of my money and trying to get better than the 1% returns bank savings accounts give you. If I can convince more young people to learn about investing and the different strategies available to them, I’ll feel good about that.”

What the pro says

“Like many Canadians, Morgan feels empowered to do things on his own,” says John DeGoey, a portfolio manager with Industrial Alliance Securities in Toronto. ” DeGoey says that generally speaking, those who invest on their own to learn more (for better or worse) than those who delegate elements of their portfolio’s management. And he also agrees that for most people, no one will care about their money more than the people who own the account.  “I say ‘most’ because I have met people who essentially abdicate all decision-making to their advisor,” says DeGoey. “I don’t like it, but it happens.”

DeGoey has two key observations for Morgan. The first, notes DeGoey, is that he’s likely setting his stop-losses too high. “If you buy something that’s inherently volatile at $10 and put in a stop loss at $10, it should come as no surprise if you get sold out in short order,” says DeGoey. ” I’d set the stop-loss lower (say $8) and then move it up if the stock begins to do well—perhaps leaving a 20% margin of safety in place at all times (e.g. moving the stop-loss to $16 if the stock goes to $20).  Setting a stop-loss at a price equal to the purchase price does not strike me as being consistent with someone who has a self-professed high tolerance for risk.”

DeGoey’s second point is also in regard to risk. “Risk and return are related,” says DeGoey.  On one hand, Morgan says he’s comfortable with risk because he has a long-time horizon. On the other, he’s using stop-losses to mitigate risk. Which is it?  “My preference has always been to buy cheap, broadly-diversified products that act as portfolio building blocks,” says DeGoey. “Products like that (ETFs, index funds) offer instant diversification.”

In the long run (i.e. over Morgan’s stated time horizon), DeGoey notes that the expected return would be comparable, but the expected risk would almost certainly be much lower. “Stated differently, there are many academics who would say that buying individual stocks leads to people taking ‘uncompensated risks’, meaning they could likely get a similar return with a lot less volatility if they just diversified more—both within and throughout asset classes.”

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