At any given time, you’re going to be bombarded with financial news. Most of it is noise. One topic that always grabs attention is interest rates. Central banks sit at the center of that conversation. In the U.S., it’s the Federal Reserve. In Canada, it’s the Bank of Canada. Elsewhere, you’re looking at institutions like the Bank of England or the Swiss National Bank.
Most central banks are trying to balance two goals. They want to support employment while keeping inflation under control. Not flat, but growing at a stable and manageable pace.
They do this by setting policy interest rates. Think of this as the baseline cost of borrowing. When inflation runs too hot, they raise rates to cool things down. When the economy slows and unemployment rises, they cut rates to stimulate growth.
The problem is when both forces show up at once. Rising inflation alongside weakening economic conditions creates a difficult environment. That’s where concerns around stagflation come in.
Right now, central banks are largely in a holding pattern. One reason is geopolitical risk. The ongoing U.S.-Israel-Iran conflict has raised concerns about disruptions to global oil shipping. Roughly a fifth of the world’s energy supply flows through critical routes like the Strait of Hormuz. Any disruption can push energy prices higher, feeding directly into inflation.
So where does that leave you as a Canadian investor, especially inside your Tax-Free Savings Account (TFSA)? Here’s my take.
The smartest move: Do nothing
The best move might not feel like a move at all. Do nothing. Stay the course.
Interest rates go up and down. They always have. Go back to the early 1980s, when Paul Volcker pushed U.S. rates above 20% to fight inflation. Since then, we’ve seen decades where real rates, after accounting for inflation, were effectively negative.
These shifts feel dramatic in the moment, but they’re part of the background.
If you’re a long-term investor, constantly reacting to rate decisions usually does more harm than good. Trying to time interest rates means trying to predict macroeconomic policy, geopolitics, and market reactions all at once. That’s not a game most retail investors win.
What actually works is much simpler. Stay diversified. Keep costs low. Reinvest your dividends. Let compounding do its job. Inside a TFSA, where gains and income aren’t taxed, that approach becomes even more powerful.
How to put “do nothing” into practice
If you’re going to embrace a hands-off approach, you need investments that can run in the background without constant monitoring. One example is the Vanguard FTSE Canada All Cap Index ETF (TSX: VCN).
This ETF gives you exposure to the entire Canadian stock market in a single purchase. That includes large, mid, and small-cap companies, with over 200 holdings across all sectors. The portfolio itself is reasonably valued, trading at a price-to-earnings ratio of about 20 times. It also maintains solid quality metrics, including an average return on equity of 11.3% and earnings growth around 12.8%.
It’s very low cost. With a 0.06% expense ratio, you’re paying about $6 annually for every $10,000 invested. That’s minimal drag on your returns. You’re also getting income along the way. The ETF currently offers a 12-month trailing yield of 2.1%, paid quarterly. Inside a TFSA, those distributions are yours to keep, with no tax reporting or deductions.
VCN isn’t flashy. It doesn’t try to predict where rates are going. It simply gives you broad exposure to the Canadian market and lets compounding do the work over time. I think this is the best way to invest for most people.
