A lot of Canadians still don’t make enough use of their Tax-Free Savings Accounts (TFSAs). However, even those that do don’t always optimize its use. For instance, stock investors may be holding off for another big market crash before getting invested. Others may be holding out in case their watch-list names turn out to be turkeys. But there are a few reasons why this kind of over-caution may actually harm a portfolio rather than help it.
How to build stock positions in a TFSA
Waiting for the bottom is not a great idea in the current market. The reason for this is simple. While the lowest point of the market must logically occur at some point, nobody knows either when it will happen or how long it will last. The markets are prone to sudden rallies, meaning that any extreme value that investors may experience could turn out to be short-lived. A deep discount could turn into a rally overnight.
There is a better way to play this market. Instead of missing out on rallies and crashes, investors should buy and sell less share, but more frequently. This is the basis of the build-and-trim technique. TSX investors can use the crashes to add weakened shares to an outstanding array of names. They can also use rallies to trim names that perform less well than others. This way, investors won’t miss the bottom, but they won’t lose the farm betting on it, either.
Some key TSX stocks to add to a TFSA include names from both ends of the risk spectrum. Investors should consider buying shares in beaten-up value from both pools. The riskier plays also bring the potential benefits of wider margins matched with shorter-term upside. Airline stocks are a prime example of this higher risk asset bracket, as are real estate investment trusts (REITs).
A top TFSA stock for long-term investors
The lower-risk TFSA investor looking for plump yields, sturdy balance sheets, and stellar outlooks should consider stashing shares in names like Manulife Financial (TSX:MFC)(NYSE:MFC). This stock has taken a beating during the pandemic market volatility, losing 25% of its share price in just three months. However, insurance is an essential industry, and one upon which all Canadians rely for peace of mind and even long-term financial stability.
Manulife’s dividend yield has been bolstered considerably by this name’s sudden downturn on the markets. This means that new investors seeking to pad a TFSA with the richest possible yields can now lock in a dividend of 6.5%. These are the kinds of yields that would have had investors scrambling in 2019. But even a partial recovery could see these kinds of margins eroded. That’s why investors should build positions now.
Manulife also supports an investment style that favours buying into the highest-quality wide-moat businesses. As Canada’s largest insurer, this name is the strongest pick in the space for long-term stability. Manulife is a market leader with a range of life insurance and wealth management products on offer to consumers. Its asset management segment commands $1 trillion in assets.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.