Kudos to the digital broker Questrade for getting the jump on its competitors in offering a First Home Savings Account, the new and best way to save for a home down payment.
FHSAs combine the best elements of tax-free savings accounts and registered retirement savings plans in that investment gains and withdrawals are not taxed, and you get a tax deduction for contributions. Let’s take a look at a cheap and simple FHSA investing strategy you could put into effect at Questrade, or any other broker.
Questrade has zero commissions for buying exchange-traded funds, so we’ll use those as a portfolio building block. Normal commissions apply when selling, but you’ll be doing a lot more buying than selling in the years you own an FHSA.
To minimize the work involved, asset allocation ETFS will be used for the FHSA portfolio. These ETFs are pre-fab portfolios tuned to different levels of risk tolerance. There are conservative, balanced, growth and all-stock versions, each with a different mix of underlying fund holding bonds and stocks from Canada, the United States and other parts of the world. You don’t need anything else in your FHSA than one well chosen asset allocation ETF.
Go with the risk level that suits you when choosing an asset allocation ETF. For many people, a growth fund weighted 80 per cent stocks and 20 per cent bonds will make sense initially. Investors more comfortable with stock market risk could go with an all-equity fund.
FHSAs can remain open for as long as 15 years, or until the end of the year you turn 71. If you don’t buy a house at some point, you can transfer your FHSA into your RRSP tax-free or withdraw the money and pay tax.
Assuming you buy a house, you’ll want to tamp down some of the risk in your FHSA at some point. If you plan to keep the FHSA for 15 years, you could think about lowering the risk level around Year 12.
If you decide suddenly to start looking for a home, then de-risk your FHSA immediately. One way to do this would be to sell your aggressive asset allocation fund holdings and put the money into high interest savings account ETFs or mutual funds, or cashable guaranteed investment certificates.
Someone who is seriously looking to buy a home wants an FHSA that is both liquid and safe. You don’t want to be worrying about what the stock market is doing on the day you make an offer to buy a first home.
-- Rob Carrick, personal finance columnist
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Constellation Software Inc. (CSU-T) Its share price has surged to record highs after shaking off a lull in 2022, and David Berman says there’s at least one good reason to stick with this rally: The company is picking off acquisitions at a brisk pace.
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Looking to catch some smaller stocks with big dividends? Try the Perch portfolio
Norman Rothery’s “Perch Portfolio” screens for smaller-sized stocks in Canada that pay dividends and looks for low price-to-earnings ratios. Since 1999, it has more than doubled the annualized returns of the S&P/TSX Composite Index. He discusses the portfolio here and provides updates on this and other dividend and value portfolios here.
Being smart can take a while to pay off as an investor
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Short seller bets against Canadian banks are nothing to worry about
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The 5-per-cent GIC is fading into the sunset - with one exception
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Others (for subscribers)
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Ask Globe Investor
Question: In a recent article, there were references to meme stocks. I don’t have a clue what that term means. What is a meme stock? – Jane R.
Answer: A meme stock is one that becomes popular with retail investors through social media. They become the topic of on-line discussion groups, who sometimes use their collective buying power to purchase shares in a company to drive up the price. The results can be astounding. On Jan. 27, 2020, shares in GameStop (GME-N) reached a high of US$86.88, up 134 per cent from the day before. The company wasn’t worth anything like that, either from a financial or business perspective. Needless to say, the inflated price didn’t last long. Investors took profits and the shares plunged. By year-end, they were down to US$4.82.
We still see periodic social media activity around GameStop and other meme stocks. GME traded as high as US$49.85 in 2022. As I write, it’s at US$23.98. I don’t recommend GME or any other meme stock but some young investors love playing them, as if they were video games. The U.S. Securities and Exchange Commission has investigated but took no action, beyond issuing a report.
--Gordon Pape (Send questions to firstname.lastname@example.org and write Globe Question in the subject line)
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Compiled by Globe Investor Staff