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Investing in stocks within a TFSA
December 25, 2020
7:34 am
pianoman8849
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Note from admin: this thread was split from a discussion about the EQ Bank TFSA

I opened a TFSA account a few weeks ago but have reconsidered. I have about $ 70,000 to invest and I doubt if the 2.3% will last past March 31st. It will probably then go to the 1.5 % vicinity.

I do have an investment account with my brick and mortar bank and I am thinking of investing there. The big bank stocks are safe and my bank, the CIBC is and has been paying dividends of 5.24% for quite a while. I can put TFSA there. That sure makes quite a difference, even from 2.3 per cent. In dollar amounts that would be approximately $ 3668 VS $ 1610 (2.3) VS 1050 (1.5) IMHO, enough of a difference to consider doing as I have mentioned. Of course, ETF's are another option. Returns are good but one is paying MER fees.

Just wanted to run that by you. So, I might keep my EQ TFSA account open and just put a hundred bucks in it to keep it open. I was an accountant and have very detailed control of my contributions and not overcontributing.

Any opinions? Thanks

December 25, 2020
7:54 am
topgun
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Nothing wrong with investing in blue chip stocks in your TFSA. It depends on your priorities.

Have a Great Day

December 25, 2020
8:06 am
AltaRed
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pianoman8849 said
Any opinions? Thanks  

It depends on what your IPS (Investment Policy Statement) says for your investment Asset Allocation (equities/bonds/cash/gold) and whether you want to increase your equity allocation percentage, and where you are on your life's journey with respect to portfolio accumulation vs portfolio withdrawal (retirement).

Regardless, your TFSA should be where your highest return (and therefore your highest risk) holdings are because of the tax free growth. For younger people in particular, the TFSA is a golden opportunity to build a tax free portfolio over 10-30 years. For those of us already into withdrawal, there is limited opportunity to use the TFSA as a growth vehicle.

December 25, 2020
9:46 am
Loonie
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I would agree with most of what AltaRed has said.

You said you "were" an accountant, so I assume that you are most likely retired, but maybe you just moved on to another line of work.

I would emphasize that clarifying your goals is key to this decision.

I don't hear you saying that you want to take on any significant risks. You consider the bank stock very safe, and that is the main option you are considering.

I think it's very important to consider what you are trying to achieve. Are you retired, basically have enough money for the duration, just want to get a bit more if you can without risk? Or are you in need of more money and therefore feel you should take some risk? Or are you younger and still trying to build for retirement? It makes a difference.

I wouldn't say that TFSA is always the best place for high risk investing, even for those inclined to take those risks. To do so assumes that you will "win" in the end and by a significant amount, which may not be the case. It depends to a large extent on how long you plan to leave it there without spending it. There is always the possibility of capital losses. While you would get dividends, you won't recoup your combined investment and opportunity costs for a while. If that should become an issue, the TFSA is not a great vehicle as you lose the contribution room, the dividend tax credit and the capital loss provision, all of which I'm sure you are very familiar with.

As regards the ETF, I wouldn't avoid it simply because it has an MER. The reason for buying it is the diversification it provides, which the bank stock doesn't. I'm not saying one is better than the other, but they are different, and a small MER is not unreasonable if the fund meets your goals for diversification.

December 25, 2020
10:11 am
pianoman8849
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Loonie said
I would agree with most of what AltaRed has said.

You said you "were" an accountant, so I assume that you are most likely retired, but maybe you just moved on to another line of work.

I would emphasize that clarifying your goals is key to this decision.

I don't hear you saying that you want to take on any significant risks. You consider the bank stock very safe, and that is the main option you are considering.

I think it's very important to consider what you are trying to achieve. Are you retired, basically have enough money for the duration, just want to get a bit more if you can without risk? Or are you in need of more money and therefore feel you should take some risk? Or are you younger and still trying to build for retirement? It makes a difference.

I wouldn't say that TFSA is always the best place for high risk investing, even for those inclined to take those risks. To do so assumes that you will "win" in the end and by a significant amount, which may not be the case. It depends to a large extent on how long you plan to leave it there without spending it. There is always the possibility of capital losses. While you would get dividends, you won't recoup your combined investment and opportunity costs for a while. If that should become an issue, the TFSA is not a great vehicle as you lose the contribution room, the dividend tax credit and the capital loss provision, all of which I'm sure you are very familiar with.

As regards the ETF, I wouldn't avoid it simply because it has an MER. The reason for buying it is the diversification it provides, which the bank stock doesn't. I'm not saying one is better than the other, but they are different, and a small MER is not unreasonable if the fund meets your goals for diversification.  

Thanks for your advice. Yes, I am a 71 year old retired accountant. I do have enough to live on from other non-registered investments as well as pensions, etc. I wouldn't be spending the TFSA dollars I would put into the CIBC stock. At least not in the foreseeable future. I wouldn't regard any big bank "high risk". Of course, being a TFSA, I wouldn't be getting a tax credit on the dividends as there wouldn't be any taxes in the first place. It would be to just generate a couple of thousand more dollars per year to contribute to my and my wife's TFSA the following year when our combined room would be $ 12,000

I have other funds in "high risk" equities. Have just invested in Pfizer, Moderna and BionTech as there is opportunity there with the COVID vaccines they are distributing at the present time. That's a matter of waiting to see what happens, as are all stock investments.

Sorry, I'm getting away from the subject at hand, TFSA's. I realize that once I put funds in CIBC, for example and wanted to get them out, I could but wouldn't be able to just transfer them back to EQ, for example, until the following year.

Thanks guys for the insight and I'll think about things. Still have a week or two before decisions have to be made.

December 25, 2020
1:31 pm
AltaRed
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pianoman8849 said

Thanks for your advice. Yes, I am a 71 year old retired accountant. I do have enough to live on from other non-registered investments as well as pensions, etc. I wouldn't be spending the TFSA dollars I would put into the CIBC stock. At least not in the foreseeable future. I wouldn't regard any big bank "high risk". Of course, being a TFSA, I wouldn't be getting a tax credit on the dividends as there wouldn't be any taxes in the first place. It would be to just generate a couple of thousand more dollars per year to contribute to my and my wife's TFSA the following year when our combined room would be $ 12,000
  

I am confused... If you buy CIBC stock in your TFSA, any dividends generated stay within the TFSA and have nothing to do with future contribution room which still remains at $12k combined.

I agree with Loonie that an ETF diversifies the risk of any one stock taking a 'black swan' event in a TFSA where cap losses cannot be utilized. There is nothing wrong with paying a 0.2% MER for that diversification.

I have no plans to ever tap into my TFSA so it has been invested in Mawer MAW104 mutual fund (60/40) for some time, but I am changing that in a few weeks to VEQT (100% global equity) to build a legacy for my heirs. A 10-20 year run if I am lucky with an estimated double* in 10 years, and quadruple in 20 years.

* Based on the rule of 72, a CAGR of 7.2% will double value every 10 years.

December 26, 2020
12:28 am
Loonie
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I am confused in the same way that AltaRed is. Any future contributions to your TFSA will necessarily come from non-registered funds. Dividends will remain in the TFSA unless you take them out, but you would not be any further ahead if you did as that would just increase your contribution for the following year, for which you would still need to find non-registered money. Did you perhaps mean that you would keep the dividend money in the TFSA but would invest it in more of the same stock? If so, this would not be a TFSA "contribution" per se, just a change of investment from cash to stock within the TFSA.

Based on the additional information you have given us, I see nothing wrong with putting the TFSA money into bank stocks. You could perhaps split it among 2 or 3 of the banks for added diversification in case one of them runs into something unexpected that might lower the dividend or price.

You have indicated that you have a variety of other investments.
I think you should do an assessment, if you haven't already, as to how much you have in which sectors, large vs small cap, global diversity etc, and what your goal is in that regard. Do you, for example, want to maintain a standard 60/40 balance, or do you perhaps want less on the equity side in view of age, market pessimism, etc.? You probably have some wiggle room there but nobody likes to lose because of a shorter than expected run (life). You should have a rebalancing plan in place to ensure that you maintain whatever ratio you have decided on; and this goal should be revisited annually to see if it still stands.
In this regard, you should evaluate what percentage of assets you want in "high risk", "low risk", cash/bonds/GICs etc. You should then rearrange investments to meet this overall goal, bearing in mind the different advantages and disadvantages of registered and non-registered channels. This process may dictate what you should put in your TFSA.

You should also take a look, if you haven't already, at how your sources of income line up to cover your basic needs. All of that should be completely secure with some plan in place as to how you will generate whatever is needed on top of that to cope with inflation and taxes.

It may turn out that you will have a lot of flexibility in terms of what to put in the TFSA, and that basically you could choose anything. AltaRed thinks this should be reserved for highest risk investments, but of course that depends on horizon. i would say, based on average life expectancies, that you should probably assume about 13 years (a bit longer i your wife is younger than you). This is a decent amount of time but it is not enough to feel too comfortable if there is a major economic downturn (which, to me, seems likely, but that's a matter of opinion). So, on that basis, I would not get too risky with the TFSA.
The Mawer fund that AltaRed mentioned is quite popular amongst conservative investors on this forum, from what I can tell, and they look after all those question of diversification, stock picks, and rebalancing for you. It has been well managed historically, and the MER appears justified although you may still find it high. I think it's around 1% but haven't looked recently. It's actually a mutual fund, and the MER is quite low for an actively managed mutual fund with good results.
Global funds, which AltaRed plans to move to, are historically more bouncy, but he feels he can afford that in view of anticipated higher long term results.

I don't know enough about the financial status of the pharma companies to say very much. But I would look very carefully before investing. A basket of health care and/or pharma stocks might be a better or safer bet.
My observation is that pharmaceutical successes can come and go. Some stick over the longer term, but in this case, we don't know how long this pandemic will last, how many doses of the various vaccines will be bought, etc. It could be all over in a year and no further need for the vaccine except in much smaller quantities. On the other hand, it may require periodic boosters until the scourge has been completely eliminated. Some as-yet little publicized product may eclipse the ones that have now been approved.
I would not choose Pfizer on the basis of its covid vaccine. The fact that it is so difficult to transport and requires two doses will mean that it gets overshadowed quickly by Moderna or whatever else can provide an effective single-dose vaccine which is easy to transport and has good shelf life at more manageable temperatures.
I have not followed the prices of these stocks at all. You would need to consider whether they are priced reasonably at this time.
If I were considering this, which I'm not, I think I'd be looking at a large cap global fund, which would include pharmaceuticals as well as other things.

December 26, 2020
6:00 am
pianoman8849
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Hi. I'm the one who takes responsibility for getting into the wrong subject here. Should have been an entirely different thread. My apologies to the moderator.

Having said that, AltaRed and Loonie, I would just be reinvesting the dividend from cash to stock, so it's not a contribution. And the suggestion that I should put the investment into more than one bank does makes sense. That's what I'm here for. To get advice and thanks for that.

I looked at the VEQT and, AltaRed, like you said, you would have it for a 10-20 year run and have a legacy for your heirs. Well, at my age and I have no children, this wouldn't be a category that wouldn't fit my situation. Good luck with that.

As for pharmaceuticals, I invested in Pfizer, Moderna and BionTech about three months ago and there has been a large increase in share price but that is levelling off. The three of them actually dipped significantly on the very day that FDA approved them. As was said how long is the COVID vaccine going to keep those stocks viable? Probably a pretty limited "shelf life" so I'm watching them pretty closely. As well, more companies are doing clinical trials for vaccines so the competition is going to increase as well, hence lowering share prices. Johnson & Johnson is doing trials on a single dose vaccine so that adds to questioning the long term value of a stock like Pfizer.

I don't have a large amount in these and most of it is with Moderna, because of the very reason that the Pfizer vaccine is much harder to transport and keep than the Moderna is. But, if I see any significant decreases that threaten what I have made, I am out of there. As with all stocks, sure, there will be some rebounds but it might be too risky to leave it there for the long term.

Thanks guys for the help. I'll look into those ETF's too. I see that BMO has some good ones which are pretty diversified.

December 26, 2020
8:49 am
AltaRed
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pianoman8849 said
I looked at the VEQT and, AltaRed, like you said, you would have it for a 10-20 year run and have a legacy for your heirs. Well, at my age and I have no children, this wouldn't be a category that wouldn't fit my situation. Good luck with that.   

I was not suggesting VEQT is right for you. Simply an example of what my 'plans' for my TFSA are. FWIW, I am also 71.

First thing I would suggest is to decide what your ultimate plans are for your TFSA, e.g. tapping into it for living expenses someday, for ongoing charitable giving or family gifting, or a bequest upon death.... and invest accordingly. The longer the TFSA will remain intact, generally the longer (and bigger percentage) you would have as an equity component.

In my case, it will be my heirs (adult children) that inherit the TFSA, so they could receive the contents 'in kind' rather than as cash and continue on with the investment for their remaining lives, or cash VEQT in for their own needs.

December 26, 2020
10:07 am
Bill
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In my view anyone looking to buy individual pharma stocks like Pfizer today might be clued out. Akin to everybody looking to buy gold when the media informs us it's hitting record highs. The whole world knows about Pfizer and its vaccines, and about Johnson & Johnson, Moderna, etc, the current prices reflect all optimistic vaccine/pandemic-related impact baked into them for quite some time now, and then some. That's not to say it's impossible that there's more good money still to be made (e.g. Pfizer's turns out to be a bust and maybe Moderna's spectacularly exceeds expectations), but generally successful investors do better by figuring out correctly what's coming down the pipe several months or more before it actually hits the popular media or it happens, i.e. not when something is obvious to every schoolkid on the planet.

Tons of ETFs out there in the global healthcare/pharma sector (from what I can see Canada's almost a nonentity in this sector, unless you like cannabis), in my view the best way to get a basket if you want to still participate in that likely-still-growing sector, but you won't find bargain prices today. Or, if you do prefer to gamble and be in and out, then clearly individual stocks would be the best way to go.

Most importantly, to me a site like this is not the ideal place to go for investing advice (including mine). Though not exclusively, but the bias here is skewed to die-hard savers, and I'd be suspicious that any recent "conversion" to being more favourable to stocks (and particularly in the usually-vilified big banks, big pharma, big multinational corporations, etc) might be mainly due to the prospect of facing almost zero return (that's before inflation and/or taxes) on their interest-bearing vehicles for a long time to come. Always consider the source & the context first, IMO.

December 26, 2020
12:30 pm
dougjp
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How true. In the stock market, by the time its common knowledge, its usually too late (applies to both buy and sell).

It's also no secret that, by now, even die-hard savers are realizing the obvious re: HIS and GIC, and perhaps reluctantly are looking for alternatives. That's why the recent conversations appear.

"I saw a subliminal advertising executive, but only for a second." ~ Steven Wright

December 26, 2020
2:15 pm
topgun
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I have stocks. Many setup for dividend re-investment. At month end I compare how they are doing. Many have not increased in years even with re-investing the dividend. I do not know how long it takes but it is certainly longer than a 5 year GIC. For 2020 GIC's look like they will beat my stock portfolio.

Have a Great Day

December 26, 2020
2:49 pm
AltaRed
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Sorry to hear that. It ultimately depends on what stocks you hold of course, but the majority of common equities have done pretty good.

XIC ETF, which is the TSX Composite, has had, per Morningstar https://www.morningstar.ca/ca/report/etf/performance.aspx?t=0P000080SN a YTD return of 6.68% return and a 5 year CAGR of 9.07%. That pretty much reflects the performance of my own portfolio.

December 26, 2020
2:54 pm
RetirEd
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I've been reading up on ETFs - particularly index ones. They do have MER and trading fees, but no loads, and the charges are exceptionally low. I know this is not a general investment forum, but may I ask where our members think good information can be found? And how to select a broker?

I have a very old copy of the Dummies Canadian ETF book, but I need current and diverse viewpoints. I do value the conservative mindset here on this forum, because I am nearing 70 and iffy about bubbles.

As for Pfizer - they certainly are high-valued now, but I would not worry too much about their general standing. They still have many high-producing drugs, and their war chest allows them to simply buy winners rather than have to gamble on only their own research.

RetirEd

December 26, 2020
3:00 pm
mechone
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I got tired of the low interest rates and bought enbridge(8.1) that pays me 500 every 3 months in dividends ,BMO(4.36) , BNS(5.25%) ,TD( 4.4) GWO(5.93) CU(5.57) now getting over a 5 % payout on my money.
Will pickup up some BCE(6.08) and some ACO(4.77) and POW(6.09) in New year

December 26, 2020
3:17 pm
AltaRed
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RetirEd said
I've been reading up on ETFs - particularly index ones. They do have MER and trading fees, but no loads, and the charges are exceptionally low. I know this is not a general investment forum, but may I ask where our members think good information can be found? And how to select a broker?
RetirEd  

I am partial to https://www.financialwisdomforum.org/ which has both a Discussion Forum and a Financial Wiki. Probably has the best signal to noise ratio of any of the financial discussion forums out there.

Both MoneySense and Rob Carrick do annual reviews of discount brokerages. Many folks will pick the discount brokerage associated with their 'main' big bank for ease of fund transfers, etc. but independents like Questrade have lower commissions.

There are also good financial websites/blogs like https://canadiancouchpotato.com/ which I think is the best for index investing (couch potato).

December 26, 2020
4:34 pm
topgun
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mechone said
I got tired of the low interest rates and bought enbridge(8.1) that pays me 500 every 3 months in dividends ,BMO(4.36) , BNS(5.25%) ,TD( 4.4) GWO(5.93) CU(5.57) now getting over a 5 % payout on my money.
Will pickup up some BCE(6.08) and some ACO(4.77) and POW(6.09) in New year  

You have good ones. Never heard of ACO. I am down east.

Have a Great Day

December 26, 2020
4:41 pm
Loonie
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For the record, I have experienced no "conversion". My own investment policy remains unchanged and I am not currently considering equities.

I try to give advice that suits the inquirer. Sometimes it favours equities; sometimes not, but it is always related to the goals and priorities of the inquirer. If the inquirer is unclear about that, as many are, then I usually suggest they stay away from equities until they are more clear.

I have invested in the stock market in the past, successfully. Never lost a penny of either my own money or the people whose POA I held, including both relatives and friends, all of whom were invested in the stock market. I am a firm believer in "buy lower, sell higher". You don't have to be in at the bottom or out at the peak in order to succeed. The only "win", ultimately, is the one you crystallize and turn into something useful, as you can't eat money.

OP appears to be in the relatively unusual and happy position where he can actually afford to take some chances on the stock market. Most inquirers, in my opinion, are not in such a position and often have stars in their eyes about the great profits they are going to make in the market, about which they do not have the patience or perhaps ability to thoroughly research. Hence, my recommendations are more conservative for them.

December 26, 2020
5:12 pm
Loonie
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Now, back to OP's concerns.

As regards the pharma companies, it's quite possible the vaccine bump is peaking, and if that is the reason you bought, then this might be the time to take some profits. I read some advice once concerning the decision to sell which I thought was wise. The author said that you should ask yourself if you would invest in this stock TODAY. If the answer is yes, then keep it; if the answer is no, then sell. I think it really is that simple, although may be hard to decide whether you would buy. i can't remember who said it.

However, pharma is a very big global industry with lots of other products and research underway, and we have the aging demographic in the West as well. It's also a highly competitive business.
A few years ago the company that developed one of the statin drugs said their goal was that everybody in the entire world would be taking this drug. I found this idea disturbing, but it shows you their potential reach, ambition/goal, and profit.
The next one to make a major breakthrough in, say, cancer, will make a mint, but there's no telling which one it will be, so, therefore, I would suggest a basket rather than individual stocks if you are looking at longer term investments in this industry.

As regards the specific stocks you have, you might consider putting a stop loss order on them or on a portion, once you decide the minimum you expect to get for them. It should help prevent a significant loss, although it always depends on finding a buyer at or close to that level. It does reduce the babysitting those stocks would require but you would always need to be alert to temporary dips due to temporary world events etc.

December 26, 2020
6:53 pm
Bill
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Never lost even one penny as an investor, Loonie, that's an incredible record! I'm not sure I've ever heard of any investor anywhere (including Buffet) being able to say that, I know I've certainly had some misses among the winners. I retract my comment about this site not being a good place to get investment advice, might not be the case at all!

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