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.