You always hear about ways to turn quintuple your TFSA contributions within some ridiculously and unrealistically short period of time, but few claims are realistic investment strategies for Foolish TFSA investors who have no desire to speculate on cannabis stocks, cryptocurrencies, or any other sort of extremely volatile asset.
So, before you chase returns with the riskiest assets out there, consider taking a step back and realizing just how much added risk you’ll stand to take by speculating with funds within your TFSA. Unlike in non-registered accounts, TFSA losses that you lock in hurt that much more, as there’s no salvage value in capital losses. You can’t offset future capital gains with capital losses within a TFSA, so it’s vital to invest and not speculate.
Just because TFSA losses amplify the pain of losses doesn’t mean you should play it too conservative, though, especially if you’re over a decade away from your expected retirement date.
Do bet on high-quality growth stocks that you’ve done your homework on. And do take calculated risks if you’ll stand to receive a magnified return over a long period of time. Don’t have unrealistic return expectations, or you’ll cause yourself to speculate and not invest.
It’s tough to score a 30% annualized return with investments, and while it is theoretically possible, you could risk losing what you can’t afford to lose. Set the bar high, but not too high such that you’ll miss the mark and face-plant on your way down.
The S&P 500 has averaged an 10% or so annualized return over prolonged periods of time. And if you’re willing to put in the homework by picking your own stocks, you can certainly achieve a higher annualized return, but don’t expect a double over the medium term, because the only way to do this consistently is to risk your shirt.
So, what’s the best way to grow your TFSA funds? Tilt the risk/reward trade-off in your favour and seek to maximize your portfolio’s Sharpe ratio — the ratio that weighs portfolio performance with consideration for the risks taken on.
It’s as simple as going for BMO Low Volatility Canadian Equity ETF (TSX:ZLB), a diversified basket of low-beta stocks that can serve as a one-stop shop for any investor who wants to lower their beta and achieve an above-average return relative to the benchmark while doing so.
If you haven’t invested a penny of your TFSA funds, you should have $63,500 in cumulative contributions as of 2019, and if you were to turn it into $100,000 in four years, you’re going to need an annualized total return just shy of 15%.
ZLB is full of defensive dividend-paying securities that tend to shine when the economy hits small bumps in the road.
The price of admission for smoothing out the rocky market ride increases, and now that interest rates are virtually capped at where they are today, many of the underlying capital-intensive dividend payers that make up ZLB (utilities, telecoms, etc.) are well positioned to increase profitability numbers at a time when aggregate earnings are under pressure.
ZLB has been roaring this year and is a safe way to grow your TFSA.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette owns shares of BMO Low Volatility CAD Equity ETF.