My young relative, who is now working for his second year and is depositing his cheques automatically into his Tangerine bank account, is now almost old enough to open a TFSA. You can start a TFSA when you turn 18 (19 in BC) if you are a Canadian resident and meet the other requirements. I’ve been thinking about where my relative should put his first TFSA contribution of $5500. (He will open his TFSA in 2018.) I’m wondering if he should buy some units of the Tangerine Investment funds for his first TFSA.
Does Tangerine Offer Any TFSA Promotions for Their Investment Funds in January?
What started me thinking was an advertisement I received in the mail in January from Tangerine. They were offering me a cash bonus for adding new money into a Tangerine TFSA Investment Fund before the end of March. I don’t intend to accept their offer because I have my TFSA at BMO InvestorLine these days.
But what about my young relative who is just opening his first TFSA ever the day after his 18th birthday?
Should I Invest My TFSA in Mutual Funds, ETFs, or Stocks ?
Most young adults who are opening their first TFSAs don’t have a lot of money saved up. Usually, they need to keep what savings they do have in cash ready to spend to pay for college, university, trade school, or other important firsts like first and last month’s rent or a first car or home.
Those people usually will open a high-interest-savings account form of TFSA. It won’t make much money for them, but the little interest it does earn will be tax-free.
My young relative is a bit different. He has a small stash of money from an inheritance, well under $20 000, but it’s money that is not meant to be used for his education or the usual first purchases. Some of that money could be invested for the long-term and not used for 10 or more years or even until retirement.
So there is a possibility he may want to invest $5500 with a 10-year-plus time frame before it’s needed or used.
That makes investing some of that money in stocks, ETFs or mutual funds a possibility if it suits his risk tolerance and his goals.
If I Only Have $5500 to Invest for the Next 10 Years What Should I Invest In: Stocks, ETFs or Mutual Funds?
So if he decides to invest the $5500 in his TFSA for the long term and if he likes the idea of risking the money in the stock market, where it can lose everything, how should he do it?
According to the Canadian Couch Potato, investing in individual stocks with a very small amount like $5500 does not provide much protection against a mistake. You could only buy a few shares in a few companies and you would have to pay annual brokerage fees and commissions on the purchases. It’s just not sensible.
Investing in ETFs which mirror an entire stock exchange is possible. There are some small online brokerages where you can make these purchases for no or low fees. It’s not ideal, though, because you usually will have to make more contributions or purchases to avoid annual account fees. (There are a few exceptions.) And if you intend to invest as a proper Couch Potato, you will need to re-balance your investments at least annually. That re-balancing could cost you more in commissions to sell and buy additional units in the ETFS.
What the Canadian Couch Potato recommends for very small investments, under say $50 000, is investing in mutual funds.
Not just any funds though! The recommendation is to use Tangerine Investment Funds or TD e-Series funds. You can read the details on the Canadian Couch Potato website.
Which Tangerine Investment Fund Should I Buy With My TFSA Contribution?
OK, so if my young relative decided to put his $5500 in a TFSA at Tangerine, in which Investment Fund should he buy units?
I looked at the Funds online. As of January 2018, the following funds were offered:
- Tangerine Balanced Income Portfolio
- Tangerine Balanced Portfolio
- Tangerine Balanced Growth Portfolio
- Tangerine Dividend Portfolio
- Tangerine Equity Growth Portfolio
How much of each is invested in bonds?
- The Balanced Income is 70% bonds.
- The Balanced is 40% bonds.
- The Balanced Growth is 25% bonds.
- The Dividend is 0% bonds.
- The Equity Growth is 0% bonds.
Many Couch Potato type investors recommend an asset allocation of about
- 25% bonds
- 25% Canadian stock market
- 25% US stock market
- 25% world stock markets
For someone who intends to stay invested for 10+ years. The actual percentages have to be chosen by the investor.
Should I Buy Bonds or a Bond Fund In My Couch Potato Portfolio?
The only problem is that right now, I’m a bit uncertain about investing 25% of a portfolio in bonds or bond funds. As interest rates climb, bond values can drop. And there is a lot of discussion of interest rates slowly increasing over 1-7 years.
Bonds are meant to be the “fixed income” part of the portfolio that does not react the same way as the stock market does to world events. There are other types of fixed income, though, including cash and GICs. Traditionally, bonds earn you more money on your investment than staying in cash or GICs. Given the uncertainty for the next few years, though, I think I’d recommend my young relative keep their 25% fixed income portion in cash or GICs.
With that criteria, only two of the Tangerine funds are still under consideration:
The Dividend and the Equity Growth Portfolios both do not have any bonds.
The Dividend Portfolio does not capture as many different companies as the Equity Growth Portfolio does.
What Do I Recommend My Young Relative Invest His TFSA Money In at Tangerine?
So if I was asked, my recommendation for my young relative for his $550 TFSA contribution which is to be invested for at least 10 years is:
$5500/4 = $ 1375
Invest $ 1375 in a TFSA high-interest savings account or a TFSA 1-year GIC. At Tangerine, these are called a Tangerine Tax-Free Savings Account or a Tangerine Tax-Free Guaranteed Investment (GIC).
He can also invest in a TFSA high-interest savings account or GIC at another institution if he finds a better rate. Investing in a GIC may cause a bit of trouble when it’s time to re-balance the portfolio next year, though, if it’s not at Tangerine. It may cost money to transfer a TFSA from one place to another, and the money cannot be withdrawn before December 31 and re-contributed on January 1 because the GIC will not have matured yet.
So for simplicity, I would suggest he invest in a TFSA GIC only at Tangerine, or in a TFSA HISA anywhere.
Then I’d suggest he invest the balance in units of the Tangerine Equity Growth Portfolio.
So
$1 375 into a TFSA high interest savings account, possibly the Tangerine Tax-Free Savings Account:
Or into a Tangerine Tax-Free Guaranteed Investment (GIC)
$ 4 125 into units of the Tangerine Equity Growth Portfolio
Then next year, I’ll explain to him how he needs to re-balance his investment so that it is still invested 25% in fixed income and 75% in the Equity Growth Portfolio.
Of course, knowing my young relative, he may never ask my opinion. I just hope he doesn’t go spend it all on a cryptocurrency like Bitcoin. There is a difference between speculating (also known as gambling) and investing!
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