The best TFSA investment for a time horizon of 3 to 5 years

Q. Can you please recommend an ETF for my daughter’s TFSA? Her time horizon is three to five years.

— Dina

A. ETFs are an excellent choice for long-term investors, but they’re not a good option for short-term savers. Dina, I’m guessing your daughter may need the money for tuition, or a down payment, or maybe to purchase a car in the next few years. None of those are investment goals: they’re savings goals. That’s an important distinction.

Let’s start with the key point: anyone with a time horizon of less than five years should not hold any equities. Even diversified stock ETFs can lose value over several years, so they’re just not suitable for money you plan to spend in the near future.

It’s true that there are conservative ETFs that are unlikely to lose value over brief periods, such as those holding bonds with maturities of less than five years. You can even buy an ETF that holds savings accounts and promotes itself as a “cash equivalent.” These ETFs might be useful in some circumstances—perhaps for traders who need to cash for short periods—I don’t think there is any reason to use them for traditional savings. ETFs are just the wrong tool for that purpose.

Dina, I suggest you consider GICs and savings accounts for your daughter’s TFSA. If you know for certain that she will not need the money for at least three years, then you could simply purchase a GIC with that term. But to avoid locking up all of her money, a more prudent strategy might be to put some in a one-year GIC that you can renew annually until her spending goal is close, and keep the rest in a savings account.

Your daughter’s TFSA returns won’t be much higher than inflation, but this is not the place to take on risk. What’s important is she’ll have a 100% guarantee that all her money will be there when she needs it.

Dan Bortolotti, CFP, CIM, is an associate portfolio manager and financial planner with PWL Capital in Toronto.


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