If you are dreaming of buying your first home, you may have heard of the First Home Savings Account (FHSA), a new registered plan that will be available in Canada starting April 1, 2023. The FHSA allows you to save up to $40,000 tax-free for your first qualifying home, and also deduct your contributions from your taxable income. But what kind of investments can you hold inside an FHSA, and how can you choose the best ones for your goals and risk tolerance? In this article, we will explore some of the options and strategies for investing inside an FHSA.
What Investments Can You Hold Inside an FHSA?
According to Finance Canada, an FHSA would be permitted to hold the same qualified investments that are currently allowed to be held in a TFSA, such as:
- Cash
- Guaranteed investment certificates (GICs)
- Mutual funds
- Exchange-traded funds (ETFs)
- Stocks
- Bonds
This means that you have a lot of flexibility and choice when it comes to investing inside an FHSA. However, not all investments are suitable for everyone, and you should consider your personal situation, objectives, time horizon, and risk tolerance before making any investment decisions.
How to Choose the Best Investments for Your FHSA?
There is no one-size-fits-all answer to this question, as different investors have different preferences and needs. However, here are some general guidelines that may help you choose the best investments for your FHSA:
- Know your goal and time horizon. Your goal is to save enough money for a down payment on your first home. Your time horizon is how long you plan to save before buying your home. These factors will affect how much risk you can afford to take and how much return you need to achieve your goal. For example, if you plan to buy a home in five years, you may want to invest more conservatively than if you plan to buy a home in 15 years.
- Know your risk tolerance. Your risk tolerance is how much volatility and uncertainty you can handle in your investments. It depends on your personality, financial situation, and emotional factors. Generally speaking, the higher the risk, the higher the potential return, but also the higher the potential loss. You should invest in a way that matches your risk tolerance, so that you can sleep well at night and stick to your plan.
- Diversify your portfolio. Diversification means spreading your money across different types of investments, such as stocks, bonds, cash, etc. This can help reduce your overall risk and smooth out your returns over time. You can diversify by investing in different asset classes (e.g., stocks vs bonds), different sectors (e.g., technology vs health care), different regions (e.g., Canada vs US vs international), and different styles (e.g., growth vs value).
- Review and rebalance your portfolio regularly. As time goes by, your goal, time horizon, risk tolerance, and portfolio performance may change. You should review your portfolio at least once a year and make any adjustments as needed. For example, you may want to rebalance your portfolio by selling some of the investments that have gone up in value and buying some of the investments that have gone down in value. This can help you maintain your target asset allocation and risk level.
Examples of Investment Strategies for FHSAs
To give you some concrete ideas of how to invest inside an FHSA, here are some examples of possible investment strategies based on different scenarios. Note that these are hypothetical examples only and not intended as specific advice or recommendations.
Scenario 1: You plan to buy a home in 10 years and have a moderate risk tolerance.
In this scenario, you may want to invest in a balanced portfolio that consists of 60% stocks and 40% bonds.
This can provide you with a reasonable return while reducing your exposure to market fluctuations.
You can further diversify your portfolio by investing in different types of stocks (e.g., large-cap vs small-cap) and bonds (e.g., government vs corporate) from different regions (e.g., Canada vs US vs international). You can also use mutual funds or ETFs to access a wide range of investments with low fees and minimum hassle.
Scenario 2: You plan to buy a home in five years and have a low risk tolerance.
In this scenario, you may want to invest in a conservative portfolio that consists of 80% bonds and 20% stocks.
This can provide you with a steady income and preserve your capital while minimizing your exposure to market fluctuations.
You can further diversify your portfolio by investing in different types of bonds (e.g., short-term vs long-term) and stocks (e.g., dividend-paying vs growth-oriented) from different regions (e.g., Canada vs US vs international). You can also use GICs or cash equivalents to ensure liquidity and safety.
Scenario 3: You plan to buy a home in 15 years and have a high risk tolerance.
In this scenario, you may want to invest in an aggressive portfolio that consists of 90% stocks and 10% bonds.
This can provide you with a high return potential while accepting a high level of volatility and uncertainty.
You can further diversify your portfolio by investing in different types of stocks (e.g., value vs growth) and bonds (e.g., high-yield vs investment-grade) from different regions (e.g., Canada vs US vs emerging markets). You can also use cryptocurrencies or other alternative investments to enhance your returns and diversification.
Conclusion
The FHSA is a new registered plan that can help you save for your first home tax-free. You can invest in a variety of investments inside an FHSA, depending on your goal, time horizon, risk tolerance, and preferences. You should also diversify, review, and rebalance your portfolio regularly to optimize your performance and risk level. By following these guidelines, you can make the most of your FHSA and achieve your dream of homeownership sooner.