Best TFSA Investment Options
With all the choices out there for investing in your TFSA, it can be confusing for the typical Canadian trying to save up. You’ve got your choice of cash, GICs, bonds, stocks, ETFs, and mutual funds, or some combination of these. What you ultimately decide to put in your TFSA depends a variety of factors:
- What are your using your TFSA for? If you are using it as a retirement vehicle (either on its own or as a complement to your RRSP) then your choices will be different from somebody using their TFSA for purchasing a new car.
- What timeline are you looking at? Are you trying to invest long term (over decades) or short term (a few years)? Different kinds of investments pay off over different timelines so you don’t want to invest in products which won’t give significant returns for decades if you need the money in 5 years.
- Do you have alternate investment accounts or is your TFSA your sole investment vehicle? If you have investments elsewhere (RRSPs, non-registered company shares, etc) then your investment choices will be different from somebody relying only on their TFSA.
- How much money do you have available to invest? People with more disposable income typically make different investing decisions vs those with less disposable income.
- What is your risk tolerance? This is tied to other factors such as income level, your age, and what you are using the money for. If you have a low tolerance for risk you’ll certainly make different decisions compared to those willing to risk a bit more.
- How much do you know about investing? If you are a novice, chances are you’ll want the security of having a financial advisor make some decisions for you. If you know a bit more, or are willing to learn, you can try your hand at independent investing with an online firm.
Diversification is key!
Regardless of your specific investment choices, one of the most basic rules is to diversify. Diversification allows you to weather all sorts of financial storms and still come out on top over the long term.
Put a bit of your TFSA investment in cash or short-term GICs. While going 100% cash and GICs doesn’t make a lot of sense for most people, you may want to be able to get at some of your money at a moment’s notice in the event of a medical or financial emergency.
Put more of your TFSA into mutual funds, stocks, ETFs, and bonds. The specific makeup will depend on your risk tolerance level, but make sure you include these in your portfolio. Choose a mix of Canadian, US, and international companies. However make sure not to over-diversify, as then you run the risk of your investments behaving as an index fund, overlapping mutual funds, and the more prosaic issue of various unnecessary fees associated with spreading out too thinly.
If you are a low-risk investor, go for conservative mutual funds and low-risk bonds. For the medium-risk investor, try a more aggressive mix of balanced mutual funds and ETFs. If you want to try a high-risk portfolio (or part thereof) go for growth funds and speculative stocks and ETFs.