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Well-spoken and quick-minded at the age of 82, Dorothy manages her own tax-free savings account, now worth more than $600,000. Other Trouncers may have million-dollar TFSAs, but Dorothy spends little time on hers. It was set up in 2009 and contributions have been maxed out ($102,000).
Dorothy, a retired Winnipeg lawyer, also managed her husband’s TFSA but when he passed away, it was divided equally among their children. On her grandchildren’s birthdays, she contributes funds to their accounts at Wealthsimple.
At first, her investments “would copy the holdings” of some mutual funds, such as the RBC Canadian Dividend Fund. To increase the compounding of returns, she had the dividends automatically reinvested through a dividend reinvestment plan in her online brokerage account.
How a Toronto theology student grew a TFSA to $1.1-million
Then Dorothy began to buy shares in companies that offer products that she and others enjoyed using. This “buying what you know” approach was used to advantage by Peter Lynch, manager of the top-ranked Fidelity Magellan Fund from 1977 to 1990.
As outlined in his book, One Up on Wall Street, much of Mr. Lynch’s research consisted of shopping trips with his wife and daughters to see what stores were busy. His due diligence also included consuming meals at bustling regional restaurant chains that were poised to expand across North America.
Dorothy came to this approach on her own. And instead of going to malls and diners, popular consumer offerings were found at her fingertips and those of others. Cue tech innovations of the past two decades or so: smartphones, internet search engines, word processors and online shopping.
That is, she invested many years ago in Apple Inc. (AAPL-Q), Alphabet Inc. (GOOG-Q), Microsoft Corp. (MSFT-Q) and Amazon.com Inc. (AMZN-Q). They weren’t big purchases but she was a buy-and-hold investor, which gave more time for returns to compound.
The stocks had enormous capital gains in her TFSA over the years and became dominant positions in her portfolio of 30-some stocks. Alphabet is the largest, at a 44-per-cent weight. An offset to this concentration in tech stocks is the income assets in her registered retirement income fund.
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Before 2009, she held some tech shares inside her RRIF. But when TFSAs came along, she sold them and bought the stocks in her TFSA. This move rendered their subsequent capital gains tax-free – providing a big boost in after-tax returns.
“I avoid stuff I don’t understand, like Tesla,” Dorothy added. She also avoids unprofitable companies, as was the case for Tesla Inc. for a long time. And she refuses to invest in companies whose chief executive officers are “[unflattering remark]” – so, strike three for Tesla.
Dorothy subscribes to Gordon Pape’s Income Investor newsletter for ideas on which income stocks to buy or sell in her RRIF. She also likes being able to send in questions on a range of investment topics to Mr. Pape, who has been good at responding.
She rarely checks her TFSA portfolio or sells stocks. As she says: “I don’t spend much time thinking about it.” When pressed for an estimate of the time spent on her portfolio, Dorothy replies that these days it’s roughly 12 to 15 hours a year.
One advantage of infrequently checking her portfolio: She is not subjected much to the short-term volatility of stocks. Those fluctuations can at times scare investors out of their positions and lead to jettisoning the buy-and-hold approach for the usually less successful trading approach.
This retired engineer’s emergency fund blossomed inside his TFSA thanks to a dividend ETF
What an expert says
Providing her thoughts on Dorothy’s TFSA is Nancy Woods, senior portfolio manager and investment adviser with RBC Dominion Securities Inc.
Dorothy’s TFSA has had great returns, thanks to sizable appreciation in her technology stocks. However, their weighting as a group has become quite large and now her TFSA is concentrated in this one sector. This raises the risk level, especially considering valuations for the tech stocks have become quite high.
On its own, this would call for a rebalancing of her TFSA portfolio to move capital out of the tech stocks into less-weighted sectors or even some conservative holdings such as income assets. But her portfolio extends across other accounts, notably an RRIF, so her asset allocation should be considered across all the accounts that she has.
We see that her RRIF has income assets, which helps offset the overweighting in tech stocks. Nonetheless, if it and any non-registered accounts she has are not substantial enough to generate the income needed to cover her expenses or avoid untimely depletion, Dorothy should consider changing the TFSA’s objective to a more conservative one.
Further regarding her TFSA, it would be a good idea to draw up an estate plan if one hasn’t been set up already. If Dorothy doesn’t anticipate needing to withdraw funds from it, and since she is a widow and doesn’t have a successor annuitant, then the funds could be invested for the expectation that her children would receive the assets.
Larry MacDonald is a regular contributor to The Globe and Mail. He is also the author of The Shopify Story and writes a blog on Shopify, called Shopify’s Journey