Yahoo Finance Too Many TFSA Users Make This Mistake With Their TFSA
Far too many Canadians use their TFSA as merely a place to stash cash, GICs, bonds, and other low-return investments. Interest rates are at generational lows, and returns from risk-free securities just aren’t going to cut it anymore for today’s generation of young Canadians who desire to retire comfortably.
Sure, there’s a pension to look forward to in retirement, but it may not be able to sustain a lifestyle that doesn’t include extreme frugality. And if you’re in an overheated rental market like Vancouver or Toronto, your pension may not be able to cover rent.
So, if you’re a young Canadian who’s more than a decade away from your expected retirement date, it’s a mistake to be overly conservative with cash and cash equivalents, because the only guarantee you’ll get by being so defensive is the guarantee that your wealth will not grow adequately.
And if you’re a millennial who’s many decades away from retirement age, I believe you’ve got no business dabbling with fixed-income securities that pale in comparison to the many bond proxies that are out there.
But since investors are naturally risk averse, how does a beginner suddenly go from conservative to aggressive enough to build one’s wealth over time?
Just because one’s ability to take on risk is high doesn’t mean their willingness is.
Unfortunately, there’s no magic potion to rid young Canadians of their fear of the high volatility that accompanies equities. Only a better understanding of investments and enough time invested in stocks to develop “market legs” can allow investors to become more willing to take on risk for higher potential rewards.
Moreover, forcing oneself to take on more risk than one’s comfortable with can be just as bad as remaining overly conservative. It can scare one out of the markets for good and cause one to panic sell at the worst possible moment, like in the December depths of last year, when the S&P 500 was down nearly 20% from its highs.
So, what’s the fix for the common mistake of being overly conservative with one’s TFSA?
Low-volatility equities of businesses with highly regulated cash flow streams are a perfect onramp for investors who are looking to get into the markets but have a low risk tolerance.
Consider Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN), a renewable energy and regulated utility firm that’s pretty much tailored for young beginner investors who want to make a difference with their investment dollars.
The ESG-friendly company owns some prime utility assets across North America, with water utilities, which are among the stablest cash flow streams out there, in select markets under the Liberty Utilities operating subsidiary.
Moreover, Algonquin has a front-row seat to the renewable energy industry, which stands to benefit from secular tailwinds. Renewable energy projects are in high demand across the globe, and with compelling free cash flow-generative projects in the pipeline, Algonquin is a name that can support a high dividend and growth over time while taking on less earnings volatility relative to most other businesses.
With a low beta of 0.45, Algonquin is less likely to move on any news that moves the markets. In an era of economic warfare, I’d say Algonquin is a terrific way to become more comfortable with equities as an asset class.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.
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