What to put in TFSA

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
Post Reply
MortgageSlayer
Contributor
Contributor
Posts: 13
Joined: 09 Feb 2017 08:34

What to put in TFSA

Post by MortgageSlayer »

I need some suggestions/guidance as to how I should be investing in my TFSA. Here is my current situation:

Emergency funds: Working on it, aim to have 3 months worth of expenses by the end of the year
Debt: 29k left on Mortgage (property worth roughly 1.2M). Planning to pay this off by the end of June.
Marital Status: Married
Tax Rate: 26% Federal, 11% Provincial
Provincial Residence: ON
Age: 38
Desired Asset Allocation: 80% stocks / 20% bonds (or GICs - unsure)
Desired Stock Allocation outside Canada: 95% of stocks

My RRSP balance is currently around 200k and is comprised of VTI + VXUS (maxed out).

Would it be a better idea to hold Canadian equities in TFSA and put bonds/GICs in non-registered because of expected growth or would it be wiser to buy broad-market Canadian Equity etfs in non-registered (for dividend tax credit?). I am also open to suggestions about re-prioritising my "plan".

Sorry for the long post and thanks in advance!
User avatar
Peculiar_Investor
Administrator
Administrator
Posts: 13267
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: What to put in TFSA

Post by Peculiar_Investor »

Welcome to FWF and well done on the progress to date, particularly getting the mortgage paid off. In our financial journey, that step was the biggest towards giving us financial freedom. Next was finding FWF :lol:

I'd question the stock allocation outside of Canada at 95%. I realize that Canadian equity markets represent around 3-4% of the global market capitalization, but I'd balance against the currency risks involved in having that much exposure to the movement of the loonie. Our wiki might be helpful on that front, you might want to read Home country bias. Personally I've found the Vanguard articles cited in references [2] and [5] very helpful in my education on the subject.

The tax-efficiency of where to place various asset classes is an unresolved debate on FWF. Again I'd start with our wiki article Tax-efficient investing. In particular the Further reading section provides some helpful links back to previous FWF discussion topics.

Personally my strategy has been to put fixed income (bonds/GICs etc.) in registered accounts as they're subject to the highest taxation and keep equities in non-registered accounts. The taxation impacts on fixed income are known costs and therefore controllable in this manner. Expected growth of equities is forecasting the unknowable future, so not under my control.
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
MortgageSlayer
Contributor
Contributor
Posts: 13
Joined: 09 Feb 2017 08:34

Re: What to put in TFSA

Post by MortgageSlayer »

The reason I want around 95% exposure to Canadian equities is that Canada is a very small market and I want to be globally diversified with stock weightings based on Canada's global market capitalization. I'll read up on home country bias article that you posted but in reality, I think once I invest in TFSA/unregistered accounts, my Canadian equity exposure will probably end up being around 10-15% of total portfolio anyways.

You have a good point about USD exposure but the way I see it, everything but my RRSP i.e. my income and real estate holding is in Canadian dollars. I plan on keeping my TFSA and non-registered in CAD thus limiting my foreign currency exposure in the long run. From what you said, I think I'll invest in VAB or XBB in my TFSA and eventually buy Canadian stocks in non-registered accounts. :thumbsup:

Thanks again!
User avatar
Peculiar_Investor
Administrator
Administrator
Posts: 13267
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: What to put in TFSA

Post by Peculiar_Investor »

MortgageSlayer wrote:The reason I want around 95% exposure to Canadian equities is that Canada is a very small market and I want to be globally diversified with stock weightings based on Canada's global market capitalization. I'll read up on home country bias article that you posted but in reality, I think once I invest in TFSA/unregistered accounts, my Canadian equity exposure will probably end up being around 10-15% of total portfolio anyways.
I totally understand where you are coming from, although evidence suggests most Canadian investors are the opposite and have most of their equity exposure in Canada.

That's why I linked the wiki article and particularly suggested reading the two Vanguard papers that are cited as references. I'll save you a step, they are: They are some the best research I've found on the subject and they've helped me understand how to approach my asset allocation strategy. I'm knowingly biased to Canada. My spouse and I are mid-50's and our investment policy statement has us at 70% equities (40% Canada, 15% each US and International) and 30% fixed income.
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: What to put in TFSA

Post by AltaRed »

MortgageSlayer wrote:Would it be a better idea to hold Canadian equities in TFSA and put bonds/GICs in non-registered because of expected growth or would it be wiser to buy broad-market Canadian Equity etfs in non-registered (for dividend tax credit?).
I would suggest there is no 'right' answer. It depends on your current marginal tax rates, the relative after tax yields of your fixed income and equity streams, and the cap gain potential of your equities.

I used to think it was simple, i.e. fixed income in registered accounts and canadian equities in non-registered, but with fixed income returns now so low, I no longer think that is the case, at least for TFSAs in particular, and for those in middle class income tax rates. I am of the view the TFSA should hold high yielding Canadian equities and/or high growth Canadian equities since all of the performance is non-taxable. Accordingly, I re-adjusted my own portfolio so that my TFSA now holds REITs, and if and when, my TFSA becomes big enough to consider other assets, I will include either high yielding and/or high growth Canadian equities. I would not put US domiciled equities in the TFSA due to loss of the US withholding tax.

IMO, the answer is a bit different with RRSPs simply because all the assets in the RRSP will eventually be taxable as Other Income when withdrawals are made, and my MTR will be as high at that point as it likely was when I took the tax deductions for my contributions over the years. I thus use my RRSP for fixed income assets and/or US domciled equities.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
pmj
Veteran Contributor
Veteran Contributor
Posts: 3412
Joined: 27 Feb 2005 18:15
Location: Ottawa

Re: What to put in TFSA

Post by pmj »

As stated above, there's no right answer. And this has been debated before!
AltaRed wrote:I would not put US domiciled equities in the TFSA due to loss of the US withholding tax.
If a US equity pays no dividends, there'd be no cost to holding it in a TFSA.
If it does pay dividends, the max cost in a TFSA would be 15% on the dividends. If held in a non-reg a/c or an RRSP, considering typical MTRs, it's unlikely that one would pay less than 15% on either divs or CG.
Peter

Patrick Hutber: Improvement means deterioration
MortgageSlayer
Contributor
Contributor
Posts: 13
Joined: 09 Feb 2017 08:34

Re: What to put in TFSA

Post by MortgageSlayer »

AltaRed wrote:
MortgageSlayer wrote: I used to think it was simple, i.e. fixed income in registered accounts and canadian equities in non-registered, but with fixed income returns now so low, I no longer think that is the case, at least for TFSAs in particular, and for those in middle class income tax rates. I am of the view the TFSA should hold high yielding Canadian equities and/or high growth Canadian equities since all of the performance is non-taxable. Accordingly, I re-adjusted my own portfolio so that my TFSA now holds REITs, and if and when, my TFSA becomes big enough to consider other assets, I will include either high yielding and/or high growth Canadian equities. I would not put US domiciled equities in the TFSA due to loss of the US withholding tax.
That's what I am a bit confused about, since bonds pay nothing (and even lose money), perhaps I am just better off buying GICs in a non-registered account and filling up my TFSA with Canadian equities. That way, I can at least avoid transaction costs to buy fixed income. And... I am back to where I started. :D

I guess I just need to pick one and stick to the strategy like I've done with my RRSP account.
User avatar
Koogie
Veteran Contributor
Veteran Contributor
Posts: 3971
Joined: 09 Mar 2012 16:44

Re: What to put in TFSA

Post by Koogie »

MortgageSlayer wrote:That's what I am a bit confused about, since bonds pay nothing (and even lose money), perhaps I am just better off buying GICs in a non-registered account and filling up my TFSA with Canadian equities.
That is precisely what I have done. For both mine and my wifes TFSAs. A combination dividend paying Canadian equities and niche ETFs.
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: What to put in TFSA

Post by Thegipper »

iI have a lot of success buying Canadian small caps inside my TFSAs. I have avoided the resource and materials sectors. Given your age I would be inclined to go 100% equity for your TFSA. I am reluctant to buy uS stocks inside my TFSA. I buy them inside RRSPs and RRIFs . Given the nature of currencies, the diversification and choices I think you are on the right track with your RRSPs. I buy corporate bonds. I figure I can get 3% virus 1.8% on GICs. If I was 38 I wouldn't be investing much in either of them.
Post Reply