THE $500K TFSA
Aggressive and unique strategies can pay off, writes Garry Marr, but they aren’t for those leery of high-risk opportunities.
Shafik Hirani has close to $475,000 in his tax-free savings account but his investing style might not be for the faint of heart.
“Most of where I made my money was on a couple of lucky bets on penny stocks,” said Hirani, a Calgary-based investment adviser with Aligned Capital Partners who made a major investment on Fannie Mae after it was reduced to a bulletin board stock following the collapse of the U.S. housing market.
While many Canadians have been content to park their money in cash or guaranteed income certificates, some, like Hirani have employed aggressive or unique strategies in a bid to get the most out of the relatively new savings vehicle.
That aggression made Hirani an early winner of the Financial Post’s show us your TFSA contest when he revealed a balance of about $275,000 in late 2014.
At the time, critics had suggested the Fannie Mae investment fell outside the parameters of the TFSA investing rules, which doesn’t include American overthe-counter stocks, but Harani pointed out that at the time of trade Fannie Mae was also trading on the Stuttgart Exchange in Germany, which is recognized as TFSA eligible.
(His winning roll has nevertheless caught the eye of the Canada Revenue Agency, which has investigated Canadians with extremely high balances — less than one per cent of TFSA holders — and has a special focus on investment professionals. Hirani can’t say what triggered his investigation but he’s been ordered to provide details of all of his trading in his TFSA.)
That trading, he acknowledges, is probably not for everyone but the TFSA does offer some highrisk opportunities to gamble especially in exchange traded funds.
“It is not something I would recommend to clients,” said Hirani, who bought a leveraged ETF and bet on the market going down. “You can’t short the market in a TFSA so I bought one of those inverse leveraged ETFs. I then bet on a triple leverage gold (ETF) for (that) market go to up. The risk is you could lose it all.”
Hirani looks for high market capitalization, high beta and low price. For his TFSA, he wants the volume to trade, lots of volatility and a low base for profits.
If you do want to “bet” this way, he suggests having some sort of investing foundation with a more conservative approach. “For me, my foundation is my (registered retirement savings plan).”
Ted Rechtshaffen, a certified financial planner and chief executive TriDelta Financial Partners, says what some consider a “great” TFSA strategy actually seems to be a “risky” one.
“People want to do exceptionally well because they read some article about somebody with $200,000,” said Rechtshaffen, adding ultimately to replicate that you need to throw money at some type of penny stock. “I say you do the same in your TFSA as everything else, but maybe hold more high income Canadian products in there.”
David Gramlich, a Victoriabased charter financial consultant, says his biggest frustration is he sees too many TFSA accounts with balances earning 0.5 per cent interest on a long-term investment — less than the rate of inflation.
The flip side, he said, is strategies like Hirani’s, where people who want to “take a flyer on a small cap” always do it in their TFSA. “If it really takes off, it’s obviously better in your TFSA,” said Gramlich.
More extreme might be borrowing money from the bank to invest in your TFSA, provided you have contribution room. Would borrowing at today’s prime rate of 2.7 per cent make sense if you have not maxed out your TFSA, which had an accumulated limit of $52,000 for contributions as of 2017?
“If you drop it into a TFSA and make six or seven per cent in a balanced mutual fund or an ETF — there is some math to that, if you can afford the payments,” said Gramlich. “It’s not as lucrative as a big RRSP catch up loan because you get a monster tax refund and can get rid of some of that debt right away.”
Calum Ross, a Toronto-based wealth adviser, says the problem with borrowing to put money in your TFSA, is you can’t deduct the interest. “It comes down to the simple math. Does it make sense mathematically. TFSA loans and RRSPs loans are more expensive so typically it’s cheaper (if you can borrow) using home equity,” said Ross. “Let’s say you had a client borrowing money at three per cent as long as your after tax rate is greater than that, you can.”
He adds there is a time value to borrowing that has to be factored in. “You might take that TFSA or RRSP loan to catch up on your space. You have to remember you are not matching term to term. You pay off that TFSA loan in five years but keep the TFSA for the next 30 years,” says Ross, adding you don’t want to borrow and start buying at the peak of the market.
Nathan Osterhout, a financial adviser at Edward Jones, said the biggest problem with clients seems to be getting them away from just cash in their TFSA. “They think it’s just for savings,” he says. “You need something that can really grow.”
He says what happens is people will have two or three TFSAs in multiple banks — financial institutions sometimes offer great introductory rates — and their rates is maybe 0.5 per cent.
“People don’t seem to understand they can do the same type of moves in their TFSAs, that they could put in their RRSPs,” says Osterhout. “There just isn’t a lot of strategy (being applied).”