[As we head into the final week of 2009, the posting schedule will be light around here. So, I’ll take this opportunity to wish you all a Merry Christmas, Happy Holidays and a Happy New Year. Here’s hoping that 2010 will also turn out to be happy, healthy and prosperous for you and your loved ones.]

What a difference a year makes! If the biggest story of 2008 was how quickly markets had tumbled, this year’s biggest story is likely to be how quickly markets have bounced back. As we go to press, the TSX Composite is up 29.3% and the S&P 500* is up 13.6%. The MSCI EAFE Index that tracks other developed markets is up 8.5% but emerging markets turned out to be big winners this year gaining a stunning 45.3%. Bonds also had a positive year posting modest, but positive, gains of 5.2%. If 2008 marked a flight to safely, 2009 then marked a flight back to risky assets. And, it’s not just the stock markets. Home prices also trended up in most cities further boosting the net worth of most Canadian households.

Last year, all that doom and gloom provided a silver lining — significantly cheaper asset prices. So, it only makes sense to note that the strong market recovery of this year is a mixed blessing. Yes, it makes us feel wealthier but investors in their asset allocation years would be wishing that equity markets had stayed low. (And on the other side of the coin, investors who discovered they took on too much risk will be happy to be handed a chance to rebalance their portfolio themselves instead of the market doing it for them). First-time home buyers rushing to take advantage of today’s record-low variable-rates are likely taking on too much debt because home prices are so high.

Tax-Free Savings Accounts were also a big story this year. Though the initial contribution limit of $5,000 was too low to result in any meaningful tax savings for most people, the TFSA will turn out to be a significant savings tool in a short few years time.

* — All index returns are reported in Canadian Dollars and exclude dividends.

This article has 14 comments

  1. Now just as long as the market keeps up this pace, our TFSAs will be loaded 😉

    • Canadian Capitalist

      @Sampson: We hold our emergency funds within TFSA. As a result, I think we made a grand total of $80 bucks in the TFSA. In future years though, I’ll be holding investing within a TFSA.

  2. Merry Christmas to you and your readers as well.

    Remember… money can be made in any market condition! Best for 2010!

  3. Thanks for all your hard work running this blog. Happy holidays.

  4. Merry X’mas everyone!

  5. @CC: We’re in the same boat. Actually, you’ve earned $7 more than me. Once the mortgage is gone, then we’ll start to use the TFSA to best advantage.

    Must admit though, it’s been a little bit chafing to read all the stories of people who now have $19,000 in their combined TFSA’s after investing in dividend stocks etc…

    And I share the concern about first time home buyers.

  6. Happy holidays!

  7. My wife and I actually did pretty well with our TFSA, we made about $200 each in our index bond funds, so we are happy. Like CC we are using our TFSA as our emergency fund. I’m still leary of placing stocks in the fund as I like the idea if my stock picks tank at least I can deduct my losses off any capital gains I may make in the future. I feel everyone who is putting stocks in their TFSA is gambling that their stock will always go up …. which was the problem that got us in the financial melt-down in the first place. Income generating assets seem to be the best thing to have in the TFSA for income tax reasons. Maybe I’m being too conservative but then again I have a decent pension which means I do not need to hit a homerun to actually be able to retire.

    Merry Christmas

  8. “I feel everyone who is putting stocks in their TFSA is gambling that their stock will always go up ”

    Now isnt that a lousy statement to make, I made over $10k, yes $10,000 in my TFSA in the last 6 months investing in stocks, and the money is in all cash at this point. You just have to know how and when to invest, at this point there is real evidence that the markets are highly manipulated by the banks and governments. If I hold my TFSA in cash for the rest of 2010 I would still be ahead big time.

    The big run up in stocks will eventually explode, when? I dont know, people have been calling it for this autumn but I knew since so many were expecting, it wasnt going to happen..it will happen when everyone is a bull and not looking.

    So saying that, the TFSA should only be invested in the markets, savings accouts, GIC’S, MF and even ETF’s are a real waste in my opinion, of course it depends on your risk tolerance.

  9. As per usual, I disagree with the lines of conversations regarding the TFSA. The higher the tax advantage of the investment, the less advantageous it is to hold that investment in a TFSA.

    If you’re going to invest to make a capital gain, why not do it in your taxable account since capital gains are only taxed at 25%? And not only that, you can write down some of that gain against other capital losses when you inevitably make a bad pick! The same thing goes for dividends and other distributions which are classified as “return of capital” – dividends and RoC are tax advantaged investments and you lose some of those tax advantages in a tax free account.

    Interest and income trust distributions are fully taxable. Those are the types of investments which would have the maximum benefit from sitting in a TFSA account.

    Then again, I’m not a financial planner nor investment advisor, so you should do whatever your own advisor says. But the main benefit from a TFSA comes from the impact of taxation and so from a purely taxation point of view, you should load it up with the worst investments from a purely tax standpoint.

  10. This is completely unrelated to the post but I thought it would be of interest to people here. If the government has prorogued parliament, that means that all legislation is stalled. If I recall correctly, the Home Reno tax break is not on the books yet but everyone said don’t worry about it as the opposition agrees with it and it will pass.

    Did it already pass or are people like me with their envelop of home depot receipts out of luck?

  11. Invested my TFSA in stocks but I should have used my wife’s as an emergency fund (now she is in stocks too).

  12. Don’t worry Al,you will get your prepaid tax back…just max out your TFSA before your RRSP

  13. Happy New Year CC! 🙂