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October 28, 2018 | The Sleeper

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Jason (not his own name, mercifully) bought a load of weed stocks with the money in his TFSA. Made a bundle. So, I said when he called me to gloat three weeks ago, sell. The point of investing is to make money. You did. Tax-free. Dump it.

He didn’t, of course. Human nature clicked in. After all, since he’d just made out like a bandit he wanted to do it again. More. He was a freaking stock genius.

Since then it’s been all downhill, as I told him it would be. Bubbles always burst, and the weed stocks were highly speculative. Canopy Growth has lost over 30% of its value, for example, and Aurora is down 40% while Jason’s small-cap puppies have been scorched. His six-figure TFSA has lost half its value. Yes, there are some lessons…

Buying individual stocks massively increases volatility and risk (and sometimes the return), compared to index ETFs. So it’s called ‘gambling’ instead of ‘investing.’ Second, when you make money, take it. Isn’t that the point, especially when the gains are free of tax? Finally, Jason had an opportunity to move a huge whack of money out of his TFSA while retaining the ability to replace it in the future. In effect he created years and years’ worth of new contribution space, but let it dissipate as his sheltered investments fizzled.

That’s a huge advantage of a TFSA over an RRSP. When you make a retirement plan withdrawal, that money’s gone forever. You cannot put it back into the account. Not so with a TFSA. In this case Jason could have removed fifty grand in profit from his plan and left that space open for new money in the future. Not only would be have scored by crystallizing his gain, but created an equal future opportunity. This element of flexibility is one reason everybody should have a TFSA, fully fund it and load it up with growthy stuff.

The second big advantage comes when you turn paleo and start collecting government pogey. A $500,000 TFSA (more on that in a minute) can generate $3,000 a month which is not counted as income, allowing the full CPP and OAS without tax on cash flow of about $54,000. Add in $37,000 in dividends which can be earned sans tax (if you have a low income), and this amounts to a retirement stipend of $91,000 – no tax.

All totally legit. Within the rules.

So how do you get half a mill in your TFSA?

Simple. If you’re 35 (for example) and have saved diddly, start with $100 this week then add a hundred weekly until 65. Invest in a nice B&D portfolio averaging 7% a year over the next three decades (to be consistent with the last 30 years), and on your 65th birthday you’ll have $532,000 in the account, $376,000 of which was tax-free growth. Keep it invested, skim off the monthly gain and tell the CRA to go and harass the poor people who have pensions.

Of course, if you invest this way from 20 until 65, your sleeper TFSA will contain $1.67 million, paying close to $10,000 a month. With CPP, OAS and dividend income added, that would create an income of over $170,000. Yeah, still no tax.

Now imagine a couple doing this, both filling their tax-free accounts over the course of decades. You can easily see why the very first dollars you have should go into your TFSA. Unlike a million-dollar RRSP, the income flowing out is not forced upon you, not added to your taxable income, does not push you into a higher tax bracket and the withdrawals can be replaced. Of course, you get a temporary tax break for making RRSP contributions, but that’s like sex. You’ll pay later.

By the way, looks like the TFSA limit will be increased in a couple of months.

You will recall when T2 gained power one of his first acts was to gut the TFSA limit, scaling it back by half in a politically-motivated, highly questionable move. The justification was that Canadians were not using the space, so it benefited only the wealthy. That was specious, of course, since we don’t use 90% of our RRSP room, and the richer people are the bigger the tax break they score for contributing. But, alas, logic isn’t a strong point in politics these days.

Anyway, the contribution is now CPI-adjusted and given the fact inflation has returned, that $5,500 limit we’ve had for a couple of years will be migrating higher, to six grand. Good news. But only if you use it – faithfully, religiously, consistently. Plus, don’t forget what I told you a few days ago about the ‘successor holder’. Oh yeah, and don’t be a Jason. Bulls make money. Bears make money. Pigs get slaughtered.


Note: Always bear in mind returns fluctuate. There’s no guarantee, but the longer a person stays invested the better the odds of a positive outcome. Over the past eight years our 60/40 portfolio (equity ETFs, preferred shares, a variety of bonds and REITs) had a total return of 7% (before fees, which may be tax-deductible). This year it will likely be less. Over the past 20 years the TSX gained an average of 7% annually. The S&P 500 averaged 6.7%. Below is a chart (US) showing how a balanced portfolio has performed relative at an all-stock one. What is not shown here is the lower level of risk and volatility that the balanced investor experienced. – Garth


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October 28th, 2018

Posted In: The Greater Fool

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