In year two of the FHSA, how and where should Canadians invest?

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Ryan Ferguson took to social media to deliver a message in late 2023: Canadians who are eligible to open a tax-free first home savings account (FHSA) before the end of the year should do so.
Mr. Ferguson, a financial advisor and insurance broker with World Financial Group Inc. in Toronto, says those who are only opening their FHSAs this year have already missed out on $8,000 of contribution room from 2023.
FHSAs, which became available on April 1 last year, allow Canadians who don’t yet own a home to contribute up to $8,000 a year to a lifetime maximum of $40,000.
A report from Investor Economics, an ISS Market Intelligence business, found that FHSA uptake was slow, with Canadians contributing about $4.4-billion to the accounts as of December 2023. Clients of financial advisors and full-service brokerages accounted for only about 5 per cent of FHSA assets.
Mr. Ferguson calls the figures disappointing. “My opinion around the FHSA is anyone who is not a homeowner in Canada should be opening one – whether they intend to buy a home or not,” he says.
But which investments are best suited for holding in an FHSA? Here’s what advisors are taking into account.
Most advisors agree that a client’s timeline for purchasing a home is the biggest factor when determining what to hold in an FHSA.
Gesi Commisso, partner, certified financial planner and insurance representative with Vancea Financial Group at Investia Financial Services Inc. in Woodstock, Ont., says clients who plan to purchase a home in less than two years should keep their money in low-risk investments such as a money market mutual fund.
“With that timeline, we want to keep that money extremely safe,” he says.
These clients typically have most of their down payment saved, Mr. Commisso says, and the FHSA acts as a vehicle to save the money tax-free for a couple of years and potentially make some gains.
Some clients may prefer to deposit money in the account and reap some tax-return benefits, but he warns about the effect of inflation and diminishing purchasing power.
Mr. Ferguson prefers clients with short timelines use high-interest savings accounts (HISA), in which he says clients can still get liquidity and yields above 4 per cent. However, as interest rates come down, so will returns on HISAs, money market funds and guaranteed investment certificates (GICs).
According to Investor Economics, more than half of total funds in FHSAs were in deposit accounts last year, with about one-fifth (19.4 per cent) in exchange-traded funds (ETFs), 10.5 per cent in equities, 7.8 per cent in GICs and 5.1 per cent in mutual funds (although the ETFs and mutual funds could have included cash-like funds).
Clients who can put off purchasing a home for three to five years can benefit from more aggressive investments, says Guillaume Girard, a financial advisor and investment coach with Millen Wealth Advisors in Victoria.
On a five-year time horizon, Mr. Girard recommends an asset allocation of 20 per cent cash or high-interest savings, 40 per cent fixed income and 40 per cent equities.
“The biggest missed opportunity for people is a portfolio that’s not aligned with their time horizon,” he says.
Mr. Girard says some clients may be wary of a portfolio that allocates 40 per cent of assets to stocks, but he says they can generally weather the risk when their purchase date is further out.
As for fixed-income products, Mr. Girard recommends government- and investment-grade bonds.
“By adding the term and credit risk, you can improve your returns conservatively … for your down payment, assuming that you have a time horizon that allows you to weather those fluctuations,” he says.
As his clients get within one to two years of purchasing a home, he recommends moving to cash.
“We gave the portfolio time to grow, and in those last two years, we’re going to save what will eventually become their down payment,” he says.
Clients who don’t purchase a home can transfer their unused FHSA contributions to their registered retirement savings plan or registered retirement income fund after 15 years. That means some who aren’t likely to become homebuyers may make use of FHSAs for the tax advantages.
If the client knows they won’t purchase a home and the goal is to roll the FHSA into an RRSP in 15 years and then continue investing for another five years to retirement, Mr. Girard says, that 20-year time horizon means a globally diversified portfolio of equities based on risk tolerance may be appropriate.
He recommends investing 100 per cent of the portfolio in funds such as Dimensional Fund Advisors Global Equity Portfolio or Vanguard All-Equity ETF Portfolio VEQT-T, which have shown steady annual returns of more than 8 per cent.
“People are usually afraid of market drawdowns, and I remind them that the U.S. stock market, represented by the S&P 500 index, was never negative over a 20-year period between 1919 and 2022,” Mr. Girard says.
“That means if you had invested in an S&P 500 index fund at any point and held it for 20 years, you would have made money no matter how volatile the market was.”
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