In five years from now, there will be a whopping 500,000 more Canadian millionaires out there, but how many more billionaires will be made? If you’re young and have got enough capital to invest wisely, then you too can become a TFSA multi-millionaire and maybe even a TFSA billionaire.
If you’re a retiree or an older investor and you’re not a billionaire yet, then I’m sorry to say that this article may not help you with this goal. To become a TFSA millionaire or billionaire, you need the power of compounding on your side very early. If you’re a young investor fresh out of college with a new job, then now is the time to start contributing to your TFSA and investing in growth stocks–not later; not in a month.
You need to get your TFSA opened immediately if you want the true power of compounding to start working for you. A TFSA is a very powerful tool if you maximize the contributions each year and use it to invest in fantastic businesses with huge growth potential.
The current annual TFSA contribution limit is at $5,500; Justin Trudeau reduced it from the $10,000 limit that Stephen Harper had in place last year. This is definitely going to slow down long-term returns substantially, but not to worry; young investors have time on their side, and time is necessary to unlock the full potential of tax-free compounding.
There’s a general rule of thumb: you should have bond exposure that’s the same percentage as your age. So, for example, if you’re 25 years old, then you should have a 25% exposure to bonds. I believe having this much exposure to bonds while you’re young is a huge mistake that could drastically reduce your long-term investment returns.
If you’re young, you can afford to make mistakes and to take educated risks in to maximize your returns for the long run. If you’re a retiree, a mistake could put your retirement in jeopardy, and you may have to jump back into the workforce because of a risky move that didn’t play out.
If you have any hopes of becoming a TFSA millionaire or billionaire, then forget bonds at this point. You’re young and need to focus on growth stocks that are also priced at discounts to their true intrinsic value.
Such stocks include Alimentation Couche Tard Inc. (TSX:ATD.B) or Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR), both of which are fantastic growth stocks trading on the TSX. Both companies have a proven growth strategy in place and will not saturate the market for years or even decades. Both companies also have proven managers with fantastic track records for long-term earnings growth.
Alimentation Couche Tard is an international consolidator of convenience stores–a very heavily fragmented business. Although the stock has had a terrific run over the past few years, I still believe there’s way more upside to be had as the convenience store industry is not even close to being fully consolidated.
Restaurant Brands International has the best management team in the world in 3G Capital–partners with Warren Buffett. 3G Capital is a relentless cost cutter that will drive operational efficiency down to the last penny. The company is expanding its Tim Hortons brand all over the world, similar to how Burger King was grown to an international success. Warren Buffett knows his businesses, and, in the case of Restaurant Brands, there’s endless growth potential, because there could be more acquisitions in the future.
These are just two fantastic kinds of stocks that a young investor should load up on. There are many more out there, but the strategy remains the same. Buy these terrific growth names and keep buying more if any sell-offs present themselves. Next thing you know, you’ll be a TFSA billionaire, or at least a multi-millionaire, by the time you hit retirement age.
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Fool contributor Joey Frenette has no position in any stocks mentioned. The Motley Fool owns shares of RESTAURANT BRANDS INTERNATIONAL INC. Alimentation Couche Tard is a recommendation of Stock Advisor Canada.