A TFSA investing approach that plays with fire - MoneySense

Aggressive investing and saving for a home don’t mix

Smart stock picks better suited for the long term


Cordell VanGenderen

AGE: 21
PLACE: Calgary
TFSA TOTAL: $31,834
STRATEGY: Mix of growth and dividend-paying blue chips

Like father like son. A recent Me and My TFSA profile generated a lot of interest and here’s another part to the story, the son. Cordell is a 21-year-old university student at the University of Saskatchewan. He’s doing an undergrad degree in science and hopes to one day specialize in medical tech research. Cordell still remembers the day he got interested in stocks. “It was 2010 and my big brother Derek and I had gone to the bank with my dad,” says Cordell. “I had gift money in my savings account as well as some money from my part-time job refereeing. That’s when my dad introduced us to stocks and the potential for bigger compounding gains.”

In fact, in 2010 Cordell’s only investments were in GICs and he distinctly remembers his dad openly wondering why they were investing in GICs if they were only getting 0.5% returns. “He then walked me through his stock investments and showed me the dividend returns he was getting, as well as the capital appreciation and even at that young age I could see that stocks offered the best potential for big gains over time. ”So in 2010 he switched to stock investing with an in-trust account, starting with $1,953.

Cordell’s TFSA holdings

Canadian Companies: 44.6%

International companies: 55.4%

Total: $31,834

When Cordell turned 18, he opened a TFSA account, transferred the stocks from the in-trust account, and started doing his own stock picking. “Over the past four years I’ve added earnings from my part-time landscaping job as well as my summer employment at the university and have almost $32,000 now in my TFSA,” says Cordell. “I’ve been lucky enough that my parents pay for my university education so I get to keep and save my part-time earnings in my TFSA. It’s worked out well.”

Although not a big stock picker himself, Cordell has taken more and more of his stock tips from his brother Derek, now 24. Derek starting investing in his TFSA at age 18 as well and spent a lot of time watching BNN and doing his own research on which companies were worth adding to his TFSA. Right now, Cordell’s largest Canadian holdings are Bank of Montreal and Maxar Technologies (formerly Macdonald Dettwiler) and his largest international companies are Alphabet, Edison International, Intel and Unilever. “I get most of my stock picks from my brother,” says Cordell. “He does a lot of research and studied finance in university. I trust his advice on what to buy and how to build my TFSA portfolio and it’s worked out well for me so far. But it’s a work in progress and we’re still learning together.”

He’s also started to see some compounding over the years with annual gains of 11.1%, 18.2%, and 11.3% since starting the TFSA. He also plans to keep on adding to his TFSA holdings in the future. “By the time I’m 30, and catch up with my missed TFSA contributions, I’m hoping to have $100,000 or more in that account,” says Cordell. “I can use it as a down payment on a house at that time and because I never lose the contribution room, I can add the money back into the account later as my earnings grow. Growth and flexibility are the reason why I really love investing in a TFSA and plan to keep on doing so as long as I can.”

What the pro says

“Cordell needs to be sure about what his TFSA money is for,” says John DeGoey, a portfolio manager with iAs Inc. of Toronto.  Ordinarily, DeGoey says his take on this portfolio would be positive, given Cordell’s stage in life. It is suitably aggressive, reasonably diversified and quite low cost. “In other words, if this were a portfolio for a person who wasn’t going to touch the money for 30 years or longer—which would normally be the case for someone his age—we’d be fine,” says DeGoey.

“There’s a bit of information that is disconcerting, however,” notes DeGoey. “Cordell suggests that this TFSA money might be used to provide a down payment for a house in a few years.  Financial planning 101 says you need to match investments to time horizons.  Therefore, even though Cordell is young and has a seemingly-long time horizon, the actual time horizon could be much, much shorter if the TFSA proceeds are being earmarked for a real estate purchase in the next half-dozen years or less.  Even though the investments are totally fine of and by themselves, they might be wrong for what Cordell is trying to accomplish.”

For instance, notes DeGoey, if stock markets take a tumble of, say, 20% in the next few years or so, Cordell would lose most or all of the gains he’s made so far. At that point, Cordell would likely have to choose between re-purposing his TFSA to a more traditional role (long-term financial independence) or using his TFSA for the original goal (a house purchase)—only with no net appreciation to speak of.

His advice is that Cordell needs to be honest with himself about what this money is for.  “If it’s for something long-term, he’s on the right path; if it’s down payment money, he’s playing with fire.”