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This is TFSA Trouncers, a series that profiles how Canadian investors invest their tax-free savings accounts. Whether you’ve been successful in growing your TFSA or not, we’d like to hear from you. Please fill out this form to contribute. You may choose to be anonymous, but we do require an e-mail address and may request a screengrab of your portfolio for fact-checking purposes.
Ted and his wife are retirees in their early 70s, enjoying the good life in British Columbia, near the ocean and the U.S. border. Summers are pleasantly warm, winters have almost no snow and temperatures rarely dip below 0°C.
As if they weren’t spoiled enough, their tax-free savings accounts are worth a combined $1.2-million.
But while the temperate climate was merely fortunate, building their TFSAs took work. The couple maxed out their TFSA contributions every year starting in 2009, monitored stocks and did their due diligence. Ted is also a seasoned investor, with experience back to the 1990s. Outside of the TFSAs, Ted and his wife have “two very good RRIFs and unregistered accounts with substantial holdings, all mainly in dividend-paying stocks.” They also have a small pension.
The early growth in their TFSAs was mostly thanks to a monstrous appreciation from 2012 to 2018 in the stock of one company: Premium Brands Holdings Corp. (PBH-T), a manufacturer and distributor of specialty foods.
Ted did not foresee how big the appreciation would be in Premium Brands’ stock price. In fact, he considers himself more of an income investor, so he was primarily interested in its ample dividend. “I measure my investing success by income, not by having to sell shares for income,” he adds.
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But Premium Brands was not a random pick: Ted had spent all of his working years at the company, where he became a purchasing manager. This gave him a close-up view of its inner workings and the market in which it operated.
He could see that his employer was expanding and growing into many different segments of the specialty-food market. There were lots of small operators that could be bought at good prices. As a result, Premium Brands’ sales and cash flows were on a strong upward trajectory.
As Ted said: “Our CEO was building a great company by acquiring good businesses and helping them grow. We were confident in what management was doing.”
Moreover, his company gave employees a chance to participate in the growth. It offered them the option of receiving their bonuses in cash or company shares. To his good fortune, Ted chose the shares, initially because of the dividends.
There were two or three other stocks in the early years of the couple’s TFSAs but the Premium Brands holding reached such a large size that by 2016 their TFSAs effectively became one-stock portfolios. To reduce the risk of having all their eggs in one basket, Ted and his wife began to transition their TFSAs into portfolios of conservative, dividend-paying Canadian companies, such as banks. They reinvested the dividends, further adding to the compounding of their investment returns.
As it turned out, these new investments had many good years afterward, which added to their capital gains and raised their stream of dividends. There were some scary dips in their stocks along the way, especially when COVID-19 arrived in 2020, but being investors focused on the dividend income spun off by their holdings, Ted and his wife were not overly stressed out or tempted to hit the sell button.
What an expert says
We asked Darren Coleman (CFP, PFP, FCSI), a senior portfolio manager with Raymond James Ltd., for his thoughts.
First, congratulations to Ted and his wife for their investment success. They’ve combined insight and discipline with patience to accomplish an excellent return. Warren Buffett said, “Diversification may preserve wealth, but concentration builds wealth.” Ted and his wife are an excellent example of this. They created the wealth in their TFSAs by concentrating their investing.
But as a word of warning to others, let me say that in my career, I’ve met lots of corporate employees who believed their work gave them insight into picking stocks, only to end up disappointed. I’m thinking, for example, of many Nortel employees, the poor souls who got laid off and then their million-dollar positions in Nortel stock went to zero.
Even when successful, concentration is not a sound long-term strategy. Winners don’t always keep on winning, and successfully timing a shift in concentration is difficult. So if a concentrated investment pays off, don’t take any more chances: slowly shift your investments into more diversified holdings that will meet your cash-flow needs and long-term goals.
To a certain extent, Ted has already started to reduce their risk by bringing in some bank holdings. But they could further diversify into other asset classes such as fixed income and holdings outside of Canada.
I would encourage Ted and his wife to consider their TFSAs as part of their larger financial plan and to maintain their preferred asset allocation across their entire portfolio. And it might be time to look into what this windfall can do for their lives, either spending it in their retirement or looking for philanthropy endeavours if the cash is not needed.
Larry MacDonald blogs at Shopify’s Journey and Investing Journey.