Last year, investing in your TFSA (Tax-Free Savings Account) was relatively stress-free and easy. Almost every stock and market segment seemed to work. The TSX Index closed 2024 with an 18% gain. That is over twice the average annual return of the Index.
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Returns may be difficult in 2025, but you can preserve and grow your TFSA
This year, positive returns may be harder to find. All stock indices are under pressure due to trade and economic uncertainty in North America. While that is a negative on stocks in the near term, it does create buying opportunities for longer-term investors.
If you are looking to contribute to your TFSA, here are a few tips savvy investors might want to consider in this market.
Moderate return expectations and focus on capital preservation
Firstly, set modest return expectations for your TFSA in 2025. With so much uncertainty, a mid-single-digit total return could be very respectable. It may be wise to fortress your portfolio with some really safe, boring investments.
These stocks may have limited long-term capital upside. However, if you can collect some dividend income and maintain (or modestly grow) your capital, that could count as a big win.
Utility stocks like Fortis (TSX:FTS) and Canadian Utilities (TSX:CU) offer investors bond-like passive income returns. Both stocks have over 50 years of consecutive annual dividend increases under their belt.
These are low-growth companies. They have mid-single-digit growth potential. They have only delivered single-digit annual capital returns in the past five years. However, their dividends are secured by strong balance sheets and safe business models. These stocks are as safe as they come.
Hold a diverse portfolio in your TFSA
Secondly, widely diversify your TFSA portfolio across holdings, sectors, and industries. That way if trade concerns disrupt any one theme, your portfolio won’t entirely be impacted. In Canada, you can choose from a mix of dividend-paying resilient stocks.
Real estate stocks like First Capital Real Estate Investment Trust, Dream Industrial REIT, and Boardwalk REIT are incredibly cheap right now. They also pay nice monthly dividends. These stocks are likely at trough valuations. If you hold these REITs long enough, you should collect strong income and a potential stock rerating upward.
Grocery and essential goods stocks are considered safe havens when the stock market is volatile. Stocks like Loblaws and Dollarama offer consumers an attractive value proposition for daily essentials.
These stocks enjoy stable demand and strong pricing power. These are not cheap stocks right now. However, they do provide investors a clear sightline to stable total returns in the near and long term.
Use market volatility to benefit your wealth long term
Lastly, the recent market volatility can be an opportunity for long-term TFSA investors. Market drawdowns pull down both good and bad stocks together.
There might be growth stocks that you could never buy because they have just been too expensive in recent years. This could be just the opportunity you are waiting for. Make an investment wish list and start adding when market drawdowns make valuations attractive.
Some technology stocks on my buy list include Constellation Software (a top Canadian compounder), Descartes Systems Group (a leading global transportation software provider), and Shopify (a top e-commerce company around the world).
These stocks are rarely, if ever, cheap. However, if they decline on market drawdowns, they are almost always quick to snap back when the market recovers. If you can buy them at any sort of discount, it would be a gift for the long-term thinking TFSA investor.
