Some readers of my blog post about achieving 9.2% annual gains in my TFSA wonder how I did it. I didn’t have a crystal ball. I didn’t pick penny stocks. I didn’t day trade my way to profits. I can honestly say the reason why I achieved such lofty gains was through one thing: Patience.
In fact, some would say I did poorly over the 7 year span since the TFSA was introduced. If you look at what the S&P 500 index has done over that time period you’ll notice that it’s been up over 146%. That’s an annual compound gain of over 13.5% not including dividends. The fact that I only achieved 9.2% meant I under achieved the market return of the US stock exchange. Am I disappointed that I didn’t meet maximum returns? Certainly not.
Not chasing big gains is the point of having a well balanced investment portfolio. I didn’t chase gains, nor did I put all my eggs in one basket. What if the US economy went down the gutter and the S&P tanked like 2008? Would I being singing the same song? I probably would have cried a river big enough that you would white water raft down it (probably not). Making investments isn’t about quick gains or chasing the hottest commodity. It’s about diversity and patience.
You might read this and think that investing is a waste of you time. Who’s got 7 years to double your money! “I want to be rich now!”. Investing isn’t gambling. I don’t like chasing the hot stocks to make money or reading Internet articles gallivanting about the next Apple. It’s all about being slow and steady. If you’re looking to gamble, may I introduce you to Mr. Donald Trump.
Perhaps he can provide you more solid financial advice that might suit your financial needs.
So why did I achieve a smaller gain than what the S&P produced? Simple. I held other assets that didn’t perform as well, but in doing so, I minimized the risk on my investment portfolio.
If you look at the Canadian TSX, the 7 years have been kind, but not as kind as the S&P 500. The Canadian stock market has only risen around 75% since 2009. That’s an annual compound gain of around 8.3%. Not too shabby to say the least.
Throw in a Canadian bond ETF like XSB that has only risen 10% in capital gains with low yield of 2.7% in interest payments and you’re getting around 3.4% annual gain from the safe haven of bonds.
If you mix and match the ratios of a simple balanced portfolio comprising of US and Canadian stocks with a holdings in Canadian bonds, you’ll see how you can get a blended growth rate that can vary. A standard 60% equity and 40% bond holdings would already get you around 7.2% in annual gains, if you split your US and Canadian equity holdings down the middle. I’m a bit more aggressive and less risk adverse, so I went with a larger holdings in stocks than bonds, but that would be the only reason why I achieved larger gains.
Weathering the Storm
I’m going to be the first to admit, that even my 9.2% annual gain is probably unsustainable in my TFSA. I wholeheartedly think that one of these years there will be a large drop in equity prices or numerous years of no gain. A 9.2% annual gain is by far, larger than long term historical gains. I think I’m more likely to see 6-7% long term gains instead.
Does that mean I should start selling my stocks now? Of course not! I’d lose out on my dividends if I did that. What would I invest in otherwise? GICs? Cash? You must be crazy. The reason why I use a diversified portfolio is so that it can weather the bad times while taking advantage of the good times.
The great thing about having fixed income assets is that they generally move in negative correlation to stocks. When investors start fleeing stocks where do you think they put their money? Bonds of course! That’s why bond prices rise and they tend to cushion the losses you get from holding stocks. Notice how I say cushion and not prevent. You can never prevent losses when markets correct. That’s because emotions run higher than an episode of the Bachelorette.
So the moral of the story is: Don’t be scared. Don’t start crying like the Bachelorette up there. There’s no need to get emotional about your investments. Just remember to rebalance your portfolio when the waters get rough and you’ll be fine. I know I am.