Are you just getting started with investing and thinking about building a tax-free savings account (TFSA) that can weather market volatility?
If so, it pays to have a near-term goal for how large you want your account to grow. This is effectively a return goal stated in terms of a dollar amount, which is a good concrete way to think about your returns.
For a beginner, $42,000 in TFSA savings is a reasonable medium-term (three-to-five year) goal to aim for. Now, you might be thinking “Gosh, I don’t save nearly enough for that,” but remember that if you’re investing progressively over time, your money starts growing right from the beginning. So, it is quite possible to build a $42,000 TFSA in a relatively short amount of time.
However, there’s still the matter of risk. You don’t want to “put it all on red” and risk losing it all in the name of building a $42,000 TFSA. So, you need assets that can weather market volatility – such as that which was seen earlier this year after Donald Trump threatened to tariff most of the world. In this article, I will explore some ways to build a $42,000 portfolio that can weather market volatility.
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The 60/40 portfolio
A well-known portfolio strategy for surviving market volatility is a 60/40 portfolio.
A 60/40 portfolio is a portfolio that is invested 60% in stocks and 40% in government bonds (or similar assets like GICs). The basic idea behind the 60/40 portfolio is investing in asset classes with different risks. The 60% in stocks gives you more return potential, while the 40% in bonds or GICs provides you a volatility buffer and returns smoothing.
This strategy isn’t quite as simple as putting 60% of your money in any grab bag of randomly chosen stocks and a government bond. For one thing, you need to re-balance a 60/40 portfolio each year to get it back to its starting weight: differing returns lead to drift. For another thing, some stocks are a lot better than others. With that in mind, let’s look at some assets that could fit well in your 60/40 portfolio.
An example ETF that could be used in a 60/40 portfolio
Dividend ETFs tend to be good assets in 60/40 portfolios, because they hold stable mature stocks that are low volatility. They also produce above-average recurring income.
Take the BMO Canadian Dividend ETF (TSX: ZDV) for example. It’s a Canadian ETF built on TSX dividend stocks. It mostly holds banks, energy companies, utilities, and non-bank financials: the types of stocks that tend to work well in Canada. Its yield, at today’s price, is about 3.6%. The fund’s total expense ratio is 0.39% — certainly not the lowest out there, but not overly high either. Finally, ZDV has 52 holdings, which is an adequate amount of diversification for a TSX fund. So, ZDV has many qualities that ETF investors look for.
With a diversified portfolio of stocks, bonds and funds like ZDV, you can slowly but surely climb your way to a $42,000 TFSA. I’d say for an average Canadian earner starting at $0 with no kids, it can be done in three to five years.
