If you want to maximize your long-term investment returns, you need to be using your TFSA (Tax-Free Savings Account) as a tool. Tax efficiency is a crucial concept when you are gaining and building wealth. There is nothing more efficient than completely tax-free investments, which is what the TFSA provides.
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Get a TFSA and make sure to invest in it
The first step to maximizing returns is using the TFSA. Around 15 million adult Canadians don’t even have a TFSA. It’s simple to get at any bank or financial institution. The setup takes less than 15 minutes to get your TFSA up and running.
The second step is to use the TFSA as an investment account, not just a savings account. Of the Canadians who have TFSAs, only 60% were actually putting the cash to work in some sort of investment. The TFSA is completely useless if it is just a cash holding account. The earnings on a menial interest rate are so small (even on a maxed-out TFSA) that there is basically no tax saved by just keeping the account in cash.
There are plenty of investment options for a TFSA
If you want to build tax-free wealth and truly maximize the TFSA potential, you need to invest. It doesn’t matter if it is in indexes, mutual funds, bonds, exchange traded funds (ETFs), or stocks.
The only way you can compound wealth is by taking some risk and investing. It is the massive, long-term compounded gains that you don’t want to pay any tax on. That is the whole purpose of the TFSA.
If you are a new investor, there is nothing wrong with putting a piece of your TFSA into an index ETF like the iShares Core S&P/TSX Capped Composite Index (TSX: XIC). You won’t beat the market, but you also won’t underperform it. If you believe stocks (and stock markets) tend to rise over the long term, there is nothing wrong with holding this for years ahead.
However, you can also place individual bets on individual stocks that you like. Peter Lynch was an extremely successful investor by simply buying stocks in products that he really liked. Here are two examples of stocks he might be interested in today.
A top blue-chip Canadian stock
Loblaw Companies (TSX: L) is one of my favourite grocers in Canada. Its scale and assortment of brands across the consumer spectrum give it a dominant share in Canada. The grocer’s national scale gives it ample clout with suppliers to help provide better deals for its customers. A top loyalty program keeps customers coming back again and again.
While Loblaw has grown revenues by a 4% compounded annual growth rate (CAGR), it has grown earnings per share by a 23% CAGR! That is some pretty attractive operating leverage.
If you are unhappy with grocery prices, buy Loblaw stock in your TFSA as an offset. You will be happy you did over the long run.
A top Canadian growth stock
Aritzia (TSX: ATZ) is another nice pick for a TFSA. It is a little riskier than Loblaw because it is focused on discretionary clothing items. However, it has executed an impeccable growth strategy. Its stock has soared 300% in the past five years.
Aritzia’s “everyday luxury” success in Canada is being replicated in the United States (a market that is almost 10 times that of Canada). The apparel retailer has around 70 American boutiques today, but it has its sights set on over 200 in the years to come.
The company has grown earnings per share by a 66% CAGR in the past five years. With international markets largely untapped, there is still a huge opportunity for this company. Add it to your TFSA if you want to shoot for a big return in the coming years.
