Me and my TFSA
As recently as 10 years ago Tom O. felt as if he’d never have the cash to warrant opening a TFSA, let alone max out his contribution room. At that time Tom was in his 40s, with kids and a stay-at-home spouse, which is to say there was little left over at the end the month for savings. It was discouraging, but a little advice from his in-laws gave him hope.
Their advice: there’s still time to catch up on his saving. “One day the kids will be gone, your house will be paid and you will be earning more that you ever had before and by investing wisely, you can make up a ton of ground in a very short period of time,” he recalls his in-laws telling him.
That advice paid off. Tom opened his TFSA six years ago, maintaining a small balance for the first few years. For Tom he saw those funds as a vehicle to learn more about investing, applying what he’s learned by reading articles (mainly from MoneySense). But in the past few months he can proudly say he’s been able to max out his contribution room. Today his TFSA portfolio stands at $60,000.
As his in-laws predicted, lower expenses gave Tom some room to save. That, plus his own self-discipline to resist increasing spending as his income went up over the years.
Tom currently has his TFSA divided into two separate accounts. The first represents about 70% of his TFSA assets and is invested entirely in an RBC Canadian dividend fund, which carries a 1.76% MER. “It has performed well for me over the years, generating a 10.6% average annual return since inception,” says Tom. “I’m happy with that.” He likes this fund because all the companies it holds are very stable revenue generators and he feels the reinvested dividends is a great way to build his savings.
The other 30% of his TFSA holdings are in Tom’s trading account and is made up of 20 individual stocks that he researched himself before buying them. Some have done well while others have not. “I’ve had many of these small stock players with hopeful outlooks but little in assets, close up shop on me but my investment has been low enough to not matter,” says Tom. “I really do not recommend an account like this for a new investor unless they do it purely as a learning tool and keep their investment to a minimum.”
In the TFSA trading account of 20 stocks, Tom has six marijuana-related companies. One of these, Maple Leaf Green World (MGW), has done quite well, realizing over a 600% gain. “But I only have 2,000 shares which I purchased at a mere 6 cents per share and the stock has been as high (no pun intended) as .99 cents,” says Tom. “I have to constantly tell myself that it was OK as a novice investor years ago not to have dumped more money into stocks like this as I see what I ‘could have had.’ ”
His largest of holding is a recent purchase of Aphria (APH), a medical marijuana stock. “It already has a marijuana license but I’m curious to see if the proposed Canadian legalization will help this to grow in the next couple of years,” says Tom.
Apart from marijuana stocks, Tom also holds an array of companies from various sectors. About 20% of his money is invested in resources, 30% in aerospace and airline stocks and 10% in research companies.
Time to weed out some of the speculative stocks
Tom O. has a few things he can do to make his TFSA more solid. John De Goey, portfolio manager with iA Securities in Toronto, says Tom should consider getting some money out of Canada. “Currently, it looks as though 100% of his holdings are domiciled here,” says De Goey. “Canada represents about 3% of the world’s stock market capitalization. I’m pretty sure there are good opportunities in the other 97%, too.”
Relatedly, De Goey also believes that having 70% in one mutual fund is simply too concentrated. “What if the Canadian dividend sector has a rough patch—which is exactly what happened a couple of years ago? The reasons Tom gives for liking the fund would quickly morph into reasons for disliking it.”
And finally, De Goey notes that most people put a lower limit on speculative stock holdings. “Tom should see if he can get that 30% down to 20% or—better still—10%. And without being a scaremonger, Tom should also note that capital losses in TFSAs will be denied [as compared to a taxable account]. As such, putting penny stocks into TFSAs with the hope of big gains could backfire and end in big losses with no offsetting write-offs.”
MORE FROM ME AND MY TFSA:
- A modest TFSA that can take on more risk
- A TFSA high on weed stock
- A TFSA strategy in need of diversification
- An aggressive portfolio with a built-in safety net
- Relying on momentum to deliver long-term returns
- The passive aggressive TFSA strategy
- When investing, copy what works