A Torontonian recently accomplished what many Canadians dream of doing — making massive returns on his Tax-Free Savings Account (TFSA).
Chris, 54, is a CFO for a company and a fan of the BNN Bloomberg program Market Call, where investment analysts discuss stocks, he told The Globe and Mail (1). After hearing advice from analyst Eric Nuttall on the program, Chris decided to “mirror” the fund manager’s stock choices and made oil stocks a part of his portfolio.
Oil prices dipped severely during the COVID-19 pandemic due to lack of demand and other factors (2), and Chris once again took Nuttall’s advice. He bet hard on Canadian oil when the prices were at major lows — in fact, he invested his entire TFSA portfolio into oil stocks.
It was a bold move. One that paid off enormously.
Chris’ contributions to his TFSA were maxed at $102,000. Following his bet on oil, his TFSA ballooned to an astounding $500,000 as prices began to rise again. It now sits at around $800,000 — a major investing achievement.
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Breaking down the strategy
The best part about Chris’ success isn’t necessarily the gains. It’s actually the lack of taxes. Because he invested his funds in a TFSA, his contributions and the capital gains or income generated are entirely tax-free (3). However, these registered investment accounts do have limits. If you turned 18 before 2009, your total contribution room in the account is $102,000.
Chris’ move to invest in individual stocks, especially oil, was a risky bet. Oil stocks can be susceptible to a wide variety of external factors such as weather, government sanctions, wars and other geopolitical issues. Oil has crashed hard in the past, and it could once more. Chris capitalized on global events bringing the price of oil back up to record levels, but the risk of losing his investment was also high.
Investing in individual stocks, even if you’re following the advice of a financial expert, is also a risk. A study from Hendrik Bessembinder from the W.P Carey School of Business found that of all the companies listed on the stock market from 1926 until 2022, only 5% of them were responsible for 90% of wealth creation for the entire market (4). For investors picking individual stocks, the odds of success are slim.
A more diversified option
A different approach that offers more diversification and spreads out risk is to invest in Exchange Traded Funds (ETFs). These are publicly traded funds that allow you to purchase a basket of stocks or other assets at one time, similar to a mutual fund. Self-directed investors can choose from an ever-growing assortment of funds that suit their investing goals.
In fact, the SPIVA Canada Scorecard for 2024 — an annual report that tracks active fund managers’ performance versus stock benchmarks such as the TSX Composite Index — found that nearly 89% of actively managed Canadian equity funds underperformed the index (5). That means if you invested in an ETF tracking Canada’s top 250 companies instead of individual stocks, your returns would likely have been higher.
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Should you replicate Chris’ strategy?
While it is impressive, Chris’ investment strategy isn’t for everyone. Here are some general points of advice to help you invest in a more measured way.
- Get your accounts in order. Before making any major investments, especially risky ones, make sure you have enough emergency savings in place. Making a withdrawal when your stocks drop will lock in your losses.
- Follow global events without overcommitting. Trying to time the market is almost never a good idea. But, paying attention to trends and common business motifs (e.g. the growing need for energy to power AI tools) is important. Instead of picking individual stocks, invest in a sector you think has potential through an ETF to reduce your downside risk.
- Know your risk tolerance. Few investors have the tolerance to put their entire portfolio on the line like Chris. Before you invest large sums of money, know exactly how much you are willing to lose, then you won’t make panicked decisions.
- Listen to experts. Chris was right to follow an investment analyst for advice, but they’re not always right. Just as with your portfolio, you should diversify the type of analysts you follow to see the bigger picture.
Chris’ narrative is one that all Canadians want to write themselves, but there’s more than one way to achieve long-term wealth. If you have the stomach for nail-biting downturns and euphoric highs, alongside an impressive market knowledge, picking individual stocks can pay off substantially. But, for most investors, investing in a basket of stocks consistently over time will yield impressive results — without all the stress.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
The Globe & Mail (1); Reuters (2); Canada (3); SSRN (4); S&P Global (5)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.