January is a time for renewal – the changing of the calendar brings New Years Resolutions and a sense of fresh beginnings. It can be a great time to pause and reflect on financial goals, and consider how you can best invest for them.
It’s also a special time for investing: new TFSA contributions are permitted as of January 1. This makes it a good time to think about the uses of a TFSA, how you intend to use your TFSA, and whether your current portfolio is doing the job as well as it can.
Here are four considerations when reviewing your TFSA portfolio:
TFSAs can be a great place to keep emergency funds, to save up for an upcoming larger purchase, and to invest for retirement. Which of these is most important? And how much should you have allocated to each?
Having an emergency fund is arguably the most important component of most investors’ portfolio. A common rule of thumb is to have 3 to 6 months worth of expenses saved up. If your expenses have increased, either due to inflation or the birth of a child or something else, check to see if you need to top this up. If you have extra money left over after this, the next step is setting cash aside for that upcoming larger purchase (a vehicle, a vacation, etc.) is also important. Finally, any remainder can be dedicated to retirement investing.
At this point, take some time to reflect upon why this might be a good way for you to organize your TFSA. Why should it be prioritized like this? And how might you invest for these goals?
The emergency fund and the large pending purchase are both short-term goals, and so they should be invested as such. The important characteristics here are liquidity and safety, and cash satisfies these criteria. But you might as well earn some interest on that cash while you wait, so cash ETFs can be a great option.
For the retirement portion, your asset allocation depends on how far away you are from retirement, and it can depend on other factors, too. Generally, younger investors can be invested more in stocks, and those entering or in retirement could have a bit more of a balance between stocks and bonds. Asset allocation can account for over 90% of the variability in investors’ portfolio returns and impact the likelihood of reaching a financial goal, so it’s important to put some thought behind this. Target date funds, including target date ETFs, are a great solution built specifically for this purpose.
Does your TFSA have the right amount of cash (or cash equivalents, like cash ETFs) and exposure to stocks and bonds (or things like target date funds)? If not, you might need to do some light trading. But before you do, there’s one more important consideration.
One of the easiest things you can do to grow your money faster is to see if you can invest it with the asset allocation that you want, but at a lower fee. Lowering your investment fees by 1% in a TFSA portfolio worth $100,000 results in a saving of $1,000 in your first year. Just like interest, fees compound (but not in the good way), so you’ll likely save even more with each passing year. After 10 years, you could save more than $10,000, and that’s not even including the savings on new TFSA contributions.
If you own any mutual funds, chances are good that there’s an ETF that provides similar asset allocation for a fraction of the management fee. Other high fee products include closed end funds, structured products, and even some ETFs – if you own any of these, consider whether you really need them to achieve your TFSA goals, and if there might be a lower-fee ETF you could invest in instead.
Some people enjoy researching, managing, and tracking many different stocks or bonds or ETFs, but for most people, it can be a cause of stress or lead to unnecessary risk. Having a portfolio with fewer holdings can provide clarity, make your TFSA easier to manage, and really help track your TFSA goals.
One way to really simplify your TFSA is to have one low-fee ETF for each TFSA goal. As an example, you might have one cash ETF for your emergency savings, another cash ETF for your short-term larger purchase, and a target date ETF for your retirement. The great thing about simplifying your portfolio is, when it comes time to invest next year’s contribution, you’ll have a very clear picture as to how much you have set aside for each TFSA goal.
Keeping a tidy TFSA begins with thinking about your TFSA goals. Targeting the right asset allocation and avoiding high-fee products will increase your chances of meeting your goals. And keeping things simple can make the whole process easier to manage with less stress.
This article is for information/educational purposes only and must not be construed as specific financial or investment advice. Where relevant, consult a licensed professional financial advisor for help tailored to your specific circumstance. Commissions, trading fees, management fees and expenses all may be associated with an investment in exchange traded funds (ETFs). Please read the prospectus before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.