If you have a near-term goal to build a $35,000 tax-free savings account (TFSA), you should focus on balancing growth and safety. While it’s tempting to run out and invest all of your money in high-growth assets that could make you rich, the fact is, such assets are much riskier than average. What you really want in your portfolio is a mix of growth and safety. By holding a combination of high-risk, high-potential-return assets and low-risk assets, you can build the kind of portfolio that performs well without excess risk. In this article, I will explain how to build a $35,000 TFSA that balances growth and safety.
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Growth assets
To build a TFSA that balances growth and safety, you need both risk assets and low-risk assets. Risk assets provide the growth; low-risk assets provide the safety.
When it comes to getting more growth from your TFSA, there are many options. Tech stocks, junior mining stocks, venture capital (VC) funds, and more.
Tech stocks are some of the best growth stocks for the average investor. They have been the best-performing equities over the last few decades, and they also have the advantage of being more understandable than junior mining stocks and VC funds.
Consider Shopify Inc (TSX:SHOP). It is a Canadian tech stock that has risen 4,400% in the markets since it went public. The company is well known for its high growth. In the trailing 12-month period, it grew its revenue by 26%, its operating income by 153%, its book value by 25%, and its free cash flow by 8.5%. Over the last three years, the company has compounded its free cash flow at 22% annualized. Shopify still provides one of the most popular platforms for vendors to operate their own online stores. That’s a big selling point for brands that want more differentiation than being company #987,569,243 on Amazon. So, Shopify may well continue growing into the future.
Safe assets
Safe assets are also pivotal to building a TFSA that balances growth and safety. Canadian treasuries and guaranteed investment certificates (GICs) are the safest of the safe, being guaranteed/insured by the government to various degrees.
For a moderate amount of risk, you could consider a stock like Fortis (TSX:FTS). Fortis is a diversified Canadian utility company that operates regulated utilities in Canada, the U.S., and the Caribbean. FTS stock trades at 20 times earnings, which is much cheaper than Shopify. It has a relatively sensible debt-to-equity (DE) ratio of 1.2 (high DE ratios are sometimes a problem for utilities). The utility stock has a 3.8% dividend yield. Finally, it has increased its dividend for 51 consecutive years, one of the best dividend growth track records in Canada. When it comes to safety, few Canadian stocks can beat Fortis.
The bottom line on building a TFSA that balances growth and safety
The bottom line on building a $35,000 TFSA that balances growth and safety is that it takes discipline. Rather than betting it all on red, you need to diversify your funds across risky and low-risk assets. If you do so, you may eventually grow your TFSA to a far greater balance than $35,000.
