mutual funds | Financial Crooks

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.

$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!

Related Reading

How Much Can I Contribute to my TFSA?

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Recently, Tangerine sent me a big package in the mail offering me a cash incentive if I transferred my RRSP savings to them. My first reaction was “Why could they afford to send me this ad, but not afford to send me a letter advising me of their new $45 fee to transfer a RRSP or TFSA out from Tangerine to another bank?” After feeling miffed for a while, I read through the package to see whether their RRSP transfer offer was a good deal or not: here’s what I decided.

Most Places Charge You a Fee to Transfer Out Your RRSP

The first thing you should be wary of if you are considering transferring some or all of your RRSP to Tangerine is that most banks, credit unions and brokerages charge you a fee if you transfer out your RRSP assets. (When this was written, People’s Trust did not charge a fee: so there are some good guys out there.)

PC Financial, for example, charges $50 to transfer out some or all of your RRSP savings. (See: http://www.banking.pcfinancial.ca/mkt/bankaccounts/nofeebankaccount-en.html and click on Charges Apply to get the list of various fees.)

CIBC charges $100.

You’d want to check what your bank, brokerage or other institution will charge you to move your RRSP money *before* you make a decision. It may cost you more than you get as the “bonus” to move your RRSP!

How Much Is Tangerine Offering as a Cash Bonus for a RRSP Transfer?

Tangerine is offering $100 for a RRSP transfer BUT it requires a transfer of at least $10 000.

The transfer must be started before March 31 2015 by submitting a completed form to Tangerine. Tangerine will then complete the form and send it to the place your RRSP is at right now. That company must send Tangerine the cash within 60 days or you won’t get your bonus.

You can see that $100 is just enough to cover the transfer out fee from some places like CIBC so it isn’t a really sweet offer.

You could try phoning Tangerine and ask if they will pay the transfer out fee in addition to the $100 bonus. I’d be a bit surprised if they will but it never hurts to ask. (If it works, please leave a comment to let us know!)

The $10 000 minimum to earn the bonus is a large amount. Many people would be considering opening an online discount brokerage account for their RRSP when they have $15 000 – $25 000. If you have $10 000 to transfer in to Tangerine and if you are planning to contribute $5000 or more to your RRSP this year, you might want to slow down and consider brokerages first. RBC Direct Investing, for example, has no RRSP annual fee if you agree to pre-authorized RRSP contributions.

How Do I Move my RRSP Money?

In the package Tangerine sent me in the mail, they included the form needed to move a RRSP from another bank to Tangerine. You can also download the form easily from the Tangerine website.

Why Would I Consider Moving my RRSP Money to Tangerine?

For the past two years, Tangerine has not offered particularly good rates on its RRSP GICs or on its RRSP daily interest savings account. You can get better rates for both of those elsewhere as I mentioned in my article on RRSP GIC and Cash Deposit rates.
One good thing Tangerine does offer, though, is its Tangerine RSP Investment Funds. The Canadian Couch Potato website recommends these Balanced funds for investors who

don’t have a lot of RRSP savings so they would have to pay an annual fee to have a brokerage account and would find ETF purchase and sale fees are too high
don’t want to have to sell and buy different funds to keep their portfolio growth balanced each year
want to just buy one fund and add new contributions to it and not think about it too much
want to make small, steady new contributions with no fees

According to the Tangerine sales pitch I received, their three balanced funds have done acceptably in the past, earning between 6-8.59% over the past 5 years or 4.70-4.79% since they were created, depending on the fund. You should read the fund details on the Tangerine website before deciding if one of the funds is right for you. (If these returns seem a bit low, remember these Balanced Funds include bonds as well as stocks so they are less risky but also less likely to generate a huge gain or a huge loss.)

Would I Recommend Someone Else Move $10 000 in RRSP Funds to Tangerine?

Maybe.

If they are only interested in investing in GICs and cash accounts, no. I’d suggest they look at some credit unions, online trust companies and Oaken Financial first.

If they are currently investing in their RRSP at a Big Bank and are paying a high fee (MER) for a mutual fund that is not performing any better than the Tangerine low-fee (MER) funds, then I might.

If they have a small amount in their RRSP and are ok with selling some mutual funds and buying others to keep their portfolio balanced, and if they don’t mind a few hassles getting the account first set up, I’d suggest they consider TD Waterhouse e-funds account. The details are on the Canadian Couch Potato website.

If they can make regular monthly RRSP contributions and have $10 000 already, I’d suggest they look at the RBC Direct Investing brokerage account to see if it interests them.

If they have $25 000 or more and only put money into their RRSP once or twice a year, I’d suggest they look at BMO InvestorLine or CIBC Investor’s Edge. Investor’s Edge is offering free purchases and sales of ETFs until March 31, 2015 in its RRSP accounts although there’s no way to know if they will offer the same deal again next year.

Would I Move $10 000 in RRSP Funds to Tangerine?

No because I have over $50 000 in my RRSP so I prefer to use an online discount brokerage account where I can choose more types of investments.

So sorry, Tangerine, but you just wasted a bit of postage and paper by sending me this offer.