How should my Gen Z daughters invest their money in TFSAs?

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Q. I would like some input on how to advise my two daughters on where to invest their money. Right now, they are ages 22 and 23 years old. They each have tax-free savings accounts (TFSAs) of about $10,000 each. They plan to keep adding a few thousand dollars a year to their plans. Should they hold a balanced portfolio? Or, should they be diversified all around the world, not including Canada? We were thinking of investing in the iShares Core MSCI All Country World ex Canada Index (XAW) or the Vanguard Balanced ETF Portfolio (VBAL), which is a more balanced fund. The TFSAs will be untouched until they decide to buy a home, likely seven or eight years from now. The TFSA will be their main investment tool. Any suggestions would be appreciated and I will discuss with them some of your thoughts and then they can do their research before they make a final decision. —Thank you, Marcus

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FP Answers: TFSAs can be a great account choice for young people, as they offer flexibility and ease of use, Marcus. Registered retirement savings plans (RRSPs) are more suited for long-term retirement savings as a contributor’s income rises. Non-registered accounts are taxable, so using TFSAs maximizes returns. The downside of TFSAs for your daughters is that they provide limited benefits to someone planning to buy a home.

In your daughters’ situation, if these or future savings are likely to be used for a home purchase, a first home savings account (FHSA) may prove a better choice, but could also be used in tandem with the TFSAs. The FHSA was rolled out in 2023 to provide first-time home buyers additional assistance buying their home. It provides enhanced features over and above the TFSA. Like the TFSA, investment income and growth is not taxed, and withdrawals can be tax-free. In the case of a TFSA, all withdrawals are tax-free. FHSA withdrawals are tax-free for the purchase of an eligible home. The FHSA program allows individuals to contribute up to $40,000 (lifetime) to the account, with contributions of up to $8,000 per tax year and the ability to carry up to $8,000 of room from previous years. Unlike TFSA contributions, FHSA contributions are tax deductible, with potential tax savings that range from about 20 to 50 per cent for amounts deducted.

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For most young Canadians who expect to buy a home, the FHSA has become a top choice in terms of maximizing savings. If the FHSA dollars are not used for a home purchase, they can be transferred to an RRSP to maintain the tax-deferred status, but you have 15 years after opening the account to purchase a home.

After deciding which account or accounts to use, an investor can move on to the actual investments. Investment decisions should be taken with emphasis placed on risk tolerance, investment objectives, and time horizon.

You ask about buying iShares Core MSCI All Country World ex Canada Index (XAW), Marcus. Avoiding Canadian stocks altogether is probably not advisable given that your daughters will be spending most or all of their savings in Canadian dollars. A practical example would be if you only owned U.S. stocks and both the U.S. stock market and U.S. dollar dropped in tandem. You are exposed not only to the volatility of the market itself but also the U.S. dollar, so your downside (and upside) would be leveraged.

There is still a consensus that diversifying a portfolio to include assets outside of Canada is optimal, so you wouldn’t want to invest domestically only. Canada only represents about three per cent of the global stock market, so investing only in this one market has its own risks. The Canadian market also lacks sector diversification.

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You asked about Vanguard Balanced ETF Portfolio (VBAL), Marcus. This is a very simple asset allocation exchange-traded fund (ETF) that invests in a diversified basket of 60 per cent stocks and 40 per cent bonds with exposure to Canadian, U.S. and international stocks and bonds. The XAW ETF also provides diversification but is 100 per cent stocks and does not include Canadian stocks. If you are looking for a simple one-ETF solution, VBAL is more diversified and probably more suited to a new investor with a medium-term time horizon.

Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at adobson@objectivecfp.com.

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