This is TFSA Trouncers, a series that profiles Canadian investors who’ve accomplished incredible feats with their tax-free savings accounts. If you have grown your TFSA to half a million dollars or more, drop us an e-mail at dakeith@globeandmail.com or fill out this form. 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. We’ll also be profiling people who haven’t been so lucky with their TFSAs.
TFSA Trouncers has received a good number of stories from readers about big wins in tax-free savings accounts but almost none have accepted the invitation to send in their underperforming TFSAs. Yet, it is important to have counterpoints to the winners as reminders that a home run is not assured each time at bat.
Let us dip then into social media for some voices that have opened up about their TFSA bloopers.
Consider Shihab El Dessouki, a Montreal resident who graduated in 2011 from Concordia University’s John Molson School of Business and is now working as a chartered professional accountant while running a YouTube channel, Shihab Personal Finance.
The willingness of investors such as Mr. El Dessouki to share their missteps is to be applauded. Besides serving as a counterpoint, other investors can learn from their mistakes instead of from their own experience.
In 2019, Mr. El Dessouki began a journey to build a $500,000 portfolio in his registered and non-registered accounts at Questrade Inc.
As Mr. El Dessouki explains on his YouTube channel, he was drawn to Questrade because of its Margin Power tool, introduced in 2013. It allows investors to borrow against eligible assets in their Questrade TFSAs to increase buying power in their margin accounts.
A margin account is a separate account from a TFSA, wherein investors can leverage their positions by putting up as little as 30 per cent of a stock’s value with the rest covered by a broker’s loan. So, a stock worth $10,000 can be bought with $3,000 cash and a $7,000 broker loan. Capital gains earned by the investor on the $10,000 are taxable and capital losses are deductible.
A TFSA linked to a margin account boosts buying power considerably. For example, a TFSA with $100,000 in blue-chip stocks can provide enough collateral for a broker’s loan of $50,000 or more in a client’s margin account.
In short, an investor would have not only the benefit of tax-free growth for their TFSA capital but also a great deal more capital (in the form of a broker’s loan) in their margin account to deploy in pursuit of their financial goals.
If stocks on margin decline in price, the investor may get a margin call to add more capital or ditch the stocks. Otherwise, the broker will do a forced liquidation in the margin account and the TFSA. Interest rates on broker loans tend to be high.
Within this framework, Mr. El Dessouki sought to augment his returns with several option trading strategies in his margin account. Selling uncovered put options was a frequent trade (the seller of such options is entering into a contract to buy the underlying stock if it falls to the strike price of the option).
A notable case was selling a put on 100 shares in Netflix Inc. when they were trading at US$510 in the first quarter of 2022, just before an earnings release. The strike price on the option was US$430.
As long as the stock price remained above US$430 before expiring, he would have a gain equal to the income received from selling the put. But when the earnings report came out, it disappointed the market and the stock plummeted to a low of US$380.
Mr. El Dessouki was now on the hook to buy 100 shares of Netflix at US$430 each (actually, nearby prices, after he “rolled” some options). Yet, they were worth much less in the market. The broker issued a call to add substantially more capital to maintain margin or close the position. The latter option was chosen, and he took a loss of approximately US$5,000.
This experience became a tipping point. In May of 2022, he posted a YouTube video, titled: “Definitely removing Questrade margin power.”
Short of the goal of a $500,000 portfolio, Mr. El Dessouki announced that he was going to sever the link between his TFSA and margin account. There would also be a substantial cost to cover the negative equity in the margin account.
Mr. El Dessouki found that it was just too tempting to buy a lot of stocks and options when so much buying power was displayed on the dashboard of his margin account. The use of Margin Power also constrained what he could do in his TFSA: the selling and buying of TFSA assets could potentially trigger margin calls in his margin account.
What an expert says
Providing his thoughts on Mr. El Dessouki’s investing journey is James Cook (CFA), a portfolio manager with Matco Financial.
This is a clear example of the finance industry’s biggest problem, that is, allowing inexperienced investors to access complicated and risky investment strategies without providing enough information.
Successful investors use a clear decision-making process with minimal constraints. Margin calls add constraints. They can force you into making tough decisions in a bad situation – like selling an investment at its bottom. You want to minimize these types of constraints.
An example of a bad situation is what Mr. El Dessouki put himself in: selling uncovered puts, which have more downside than upside. This is the opposite of what you should look for to grow your portfolio over the long term.
It’s not wrong to seek growth while you are young. But it is important to do so with a sensible approach. Don’t let greed take over and lead you into leveraging your assets. You have a long journey ahead. Look to invest in quality companies: Buy shares in companies with strong balance sheets and good growth potential.
Building a portfolio starts with developing good savings habits. You want to contribute savings to a TFSA and RRSP for tax-efficient growth. With these accounts funded, you are ready to invest your money.
You will want to use a time-tested investment approach. The growth-at-a-reasonable-price (GARP) approach is good for long-term investing. Buy shares in growing companies at reasonable valuations and hold onto to them over the long run.
It’s a much easier approach because you are in charge of when to buy and sell a company. The control is yours. There is no one to force tough decisions. Plus, you are giving yourself the best shot at long-term growth – since GARP leads to investing in high-quality, cash-flow generating companies.
Larry MacDonald is a regular contributor to The Globe and Mail and author of a new book, The Shopify Story: How a Startup Rocketed to E-commerce Giant.