Saturday, April 7, 2012

Cash Is Not As Risk Free As People Think

TFSA is one of the best investment vehicles that exist in Canada. Contributions are made with after-tax money, but capital gains and income from investments inside a TFSA are completely tax free.

The TFSA program was started in 2009, and that was the year I started mine. Unfortunately, in what otherwise would have been a fantastic year to invest, I kept my TFSA in an interest bearing account for the first year. I remember I happily placed my $5k inside an ING TFSA account with a few months left in 2008, as there was a special offer at the time.

It turns out that would be one of the biggest mistakes I made in the last 4 years. While I didn't lose any money, I also missed out on opportunities in 2009. I probably could have transferred the account to an investment one, but the inter-institutional transfer would have been a hassle and potentially costly.

In the end, in a year where the TSX gained 40%, and my hybrid benchmark gained 16.9%, my TFSA returned a measly 1.82%. :(

Since then, I've moved my TFSA to a BMO Investorline investment account, and tried my best to gain back some ground.

  • In 2010, my TFSA gained 10.7%. The TSX gained 18.1% that year, while my hybrid benchmark I use to track my performance gained 11.9%
  • In 2011, my TFSA gained 17.1%. TSX lost 8.7% that year, while my benchmark gained 2.1%. 
  • 2012, so far, my TFSA is up 7.8%, while the TSX is up 4.6%, and my hybrid benchmark is up 6.9%.
While the performance of my TFSA portfolio has had its ups and downs relative to the TSX and benchmark, it's certainly a lot better than the 1.8% vs 40% TSX differential in 2009.

I hope this lets you see the potential risks of hiding too much in cash, money market funds, or GICs. In my case, thankfully I had other investments so my performance in 2009 wasn't too bad. My portfolio actually returned 19.8% in 2009. It is important to have a reasonable amount of cash to buy when valuations are attractive, but it is also important to not hide in cash all the time as you may miss some great opportunities.

I hope to be able to continue to grow my TFSA aggressively in the future and beat both the TSX and my benchmark.


  1. That's awesome! You're doing really well in your TFSA.

    I haven't had much luck in my TFSA, I've made too many risky plays in the last couple of years and it totally wiped out my gains from before. Right now, I'm at a loss :(