Do you want to join the TFSA (Tax-Free Savings Account) millionaire club by 2037? While a million-dollar TFSA balance might sound like a far-fetched dream, the math tells a different story.
With the current cumulative TFSA contribution room of $102,000 and a decade of strategic investing ahead, this ambitious goal is well within reach for disciplined Canadian investors. The secret lies not in complex trading strategies or market timing but in harnessing the twin powers of tax-free growth and carefully selected stocks and exchange-traded funds.
By focusing on quality companies with substantial competitive advantages and letting time work its magic, turning your TFSA into a seven-figure portfolio could be a game-changing reality by 2037. So, let’s break down how you can build this wealth-generating machine starting today.
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Build a TFSA portfolio worth $1 million
Investing in asset classes that help you beat inflation consistently is the key to building long-term wealth. Equities is one such asset class that has consistently delivered inflation-beating returns over time. For instance, the S&P 500 index has returned 10% annually over the past six decades, which is quite exceptional.
However, investing in quality growth stocks and holding them over time should help you generate outsized gains and beat the broader indices, such as the S&P 500.
So, let’s assume you invest the maximum TFSA contribution limit of $102,000 in growth stocks that return 20% annually. You also invest $7,000 each year (the TFSA contribution limit in the last two years) in low-cost index funds that track the S&P 500 index for the next 12 years.
If the S&P 500 index continues to offer an annual return of 10%, your ETF balance would be worth $149,690. Interestingly, if your equity portfolio delivers a 20% return over the next 12 years, your individual stock balance would be worth $909,442, which means the cumulative portfolio will balloon to $1.05 million.
Hold quality growth stocks in a TFSA
Canadian investors with a long-term horizon should consider gaining exposure to growth stocks such as Shopify (TSX:SHOP). Now, the key driver of a company’s stock price is revenue and earnings growth.
Shopify has increased its sales from US$105 million in 2014 to US$8.2 billion in the last 12 months. Moreover, its operating margin has improved to 13.1% from a negative margin of 20.6% in this period. Shopify stock went public in 2015 and has since returned 5,140% to shareholders over the past decade, indicating a compounded annual growth rate of 48.6%.
Basically, investing $5,000 in Shopify stock soon after its initial public offering would be worth more than $250,000 today. Interestingly, despite its stellar performance, Shopify stock is still down 23.5% from all-time highs.
Identifying a portfolio of profitable growth stocks as part of expanding addressable markets is essential, which should eventually translate to market-beating returns over a decade.
The Foolish takeaway
Investors should understand that generating 20% returns is difficult, even for the most seasoned investors. Further, around 80% of fund managers on Wall Street have failed to beat the underlying index, showcasing the complexities of investing in equities.
However, it is evident that even a single stock such as Shopify can help investors accelerate their wealth-building journey in a few years. The key is to remain patient and stay invested to benefit from the power of compounding.
