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Prep Your TFSA and RESP for any Future Corrections

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Investors tend to panic when a bear market dominates the headlines. For Canadians with investments in their Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), such news is unsettling.

It’s a test of nerves for most, although some can handle the sharp market drops better than others because of their portfolios’ underlying assets. To prep up your TFSA or RRSP for any eventuality, the key is not to overly invest in risky investments that pay high returns. While high returns are tempting, capital protection should take precedence at all times.

Sudden business reversal

Cineplex (TSX:CGX), for example, took a turn for the worst in 2020. The COVID-19 pandemic shut down theatre operations. The iconic entertainment and media company was a Dividend Aristocrat that pays as high as 7% dividend before the crisis. Sadly, the stock plummeted 54% that management had to stop dividend payouts.

While nobody expected a global pandemic, Cineplex’s business reversal shows why it’s crucial to pick defensive assets to invest in a TFSA or RRSP. You might not recover the losses at all. Besides, the growing population of streaming services and digital technology were already hurting movie theatre owners.

Cineplex shares tanked to as low as $8.84 on March 18, 2020. The current stock price of $10.64 is 68% lower than it was a year ago. The company’s fortune could change only when the world returns to normal. According to Cineplex’s CEO, Ellis Jacob, Canada’s largest movie theatre operator is in for the long haul. Still, the stock is too risky to own in a TFSA and RRSP.

Sleep easy

TFSA and RRSP users are better off investing in recession-proof stocks to counter volatility. The business of Fortis (TSX:FTS)(NYSE:FTS) will not fade nor wither regardless of the market environment. This $24.22 billion utility company is the superior choice of risk-averse investors.

Despite the COVID-induced market crash, Fortis held steady. TFSA and RRSP users holding this utility stock didn’t lose as the price hardly swung and remained flat for most of 2020. The capital gain was zero, but dividend payouts continued without interruption. Today, the stock trades at $51.90, while the dividend yield is a decent 3.91%.

Under its five-year capital investment plan for 2020 to 2024, Fortis will spend $18.3 billion. The goal is to increase the consolidated rate base from $28 billion in 2019 to $34.5 billion and $38.4 billion in 2022 and 2024, respectively. Likewise, management targets an average annual dividend growth of 6% through 2024. Last year also marked 46 consecutive years of dividend increases.

The key takeaways for Fortis are its regulated utility businesses that are mostly a diversified mix of highly executable, low-risk projects. TFSA and RRSP investors can sleep easy and not worry about the noise in the financial markets.

Invest smart

Smart TFSA and RRSP users will always prep up or rebalance their accounts by investing in different types of qualified assets like bonds, mutual funds, ETFs, GICs, and stocks. Aside from the tax shelter benefits, you mitigate the risks through diversification. If you’re maintaining a stock portfolio, include a defensive all-star like Fortis for good measure.

Speaking of ways to prep up a TFSA and RRSP in anticipation of a market crash...

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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

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