It’s one thing to make consistent contributions to your TFSA (Tax-Free Savings Account), but it’s another to properly allocate that capital with growth in mind. Indeed, we’re probably well aware of the dangers of overextending oneself on risk. Going for the high-flying AI momentum stocks could be the formula for quick losses, rather than swift gains.
And while AI stocks are a great fit for aggressive investors who know the stakes beforehand, I think that for most new Canadian investors, it’s far better to go for value plays with business models and cash flows that are far easier to understand. Of course, it’s hard to tell the future, especially with the tech sector moving at such a blistering pace, with AI and new-age data centres going online at such a ridiculous pace.
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A TFSA is better used as a stock investing account!
Any way you look at it, though, staying invested through turbulent times and smooth sailing, I believe, is the way to go. If that means setting things and forgetting, perhaps that’s the best move for a TFSA investor who has 10-15 years or more to invest in a retirement. While a $50,000 sum is far from the lifetime contribution room for those who were of age when the TFSA came to be more than 16 years ago, I think that such a sum is very respectable.
Indeed, if you have that much sitting in a TFSA portfolio, odds are you’re already ahead of most Canadians in your age group. Still, if that sum is sitting in savings, you might not realize just how much harm that inflation could do to your TFSA nest egg.
With a Bank of Canada that feels reluctant to increase interest rates, perhaps a bit of inflation in the 2.5-3% range isn’t off the table. To better deal with the slightly hotter inflation (than the 2% we’ve grown accustomed to in decades past), I believe that investing in stocks is the way to go for real returns, especially if the “new normal” of more heated inflation is no longer acceptable.
Indeed, the stock market can be volatile, but, at the end of the day, it’s a fantastic asset to help you stay ahead or, at the very least, keep up with the rising prices at the grocery store and just about everywhere else.
Starting with generous income ETFs
As for a TFSA setup for a $50,000 sum, I think that a rock-solid foundation with something like the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) is great to build on. It has a 3.1% dividend yield and a diversified mix (okay, it’s not the most diversified, given its bank and energy exposure, but it’s still a solid mix of dividend payers) of some of the most resilient large-cap cash cows on the TSX Index.
Of course, a 3.1% yield on a $50,000 sum amounts to just shy of $130 per month. For investors looking to move that average TFSA yield closer to 3.5% or even 4%, an income ETF like BMO Covered Call Utilities ETF (TSX: ZWU) could help safely tilt the yield a bit higher. With a 7.2% yield and a mix of Canadian utility stocks with a covered call strategy (that trades off capital appreciation potential for premium income), the ETF is a great passive income booster to supplement any portfolio with a sound foundation.
