This retired Albertan has figured out a way to use benchmarks to separate the true TFSA trouncers from underperformers

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When Don was a young man, he sometimes thumbed through a book of stock charts and saw a few stocks with gains of several thousand per cent. When tax-free savings accounts were introduced in 2009, he thought he would try to corral some of those high flyers.

Don, now 68 and retired in Alberta, invested his maximum annual TFSA contributions in early January of each year (with dividends reinvested). Most years, the returns were fine, but Don wasn’t sure if they were outperforming the market.

“I wanted to know if I was beating the market as that meant my time doing the research could be worthwhile,” said Don. “Otherwise, it would be better to delegate the work to a financial adviser or take a passive approach and buy an exchange-traded fund that tracks the market.”

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How to benchmark his performance against the market? Since he was adding contributions to his TFSA every year, he could not simply compare his portfolio against some market index. His solution was to simulate a passive investing approach inside a TFSA.

This required calculating what a TFSA would be worth if it had invested the maximum annual contributions at the start of each new year in a broad ETF, such as the iShares S&P/TSX 60 Index ETF (XIU-T), with dividends reinvested.

He first multiplied each annual contribution by XIU’s cumulative percentage total return from when the contribution was invested to the end of the measurement period. (Data source: the XIU chart on the Canadian website for BlackRock Inc.)

Then he totalled the amounts that the annual contributions had become by the end of the measurement period. This provided a total dollar value to compare against his active TFSA. The total in the TFSA holding XIU from the start of 2009 to the end of 2025 was $285,000.

However, like many other Canadians, Don has also invested in U.S. and foreign stocks, so a more appropriate benchmark might be the amount earned by the iShares MSCI World Index ETF (XWD-T).

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Investing in XWD within a TFSA over the 2009 to 2025 period generated more than $340,000 (the heavy weighting and strong gains of U.S. stocks in XWD most likely explain why it surpassed XIU). Don’s actively managed TFSA was lower, so his toil has not paid off.

A conservative investor pursuing a global stock and bond portfolio in a TFSA may consider as a benchmark the iShares Core Balanced Portfolio ETF(XBAL-T), which has a 60/40 ratio of stocks to bonds. Investing the annual contributions in XBAL from the start of 2009 to the end of 2025 left the TFSA with an amount just above $200,000. XBAL likely came in lower than XIC and XWD because it had a large allocation to bonds, a much smaller weighting of U.S. stocks and the rebalancing trimmed back the equity position if it rose above 60 per cent.

Don adds that TFSA investors can select different ETF benchmarks and tailor them to their own situation by using the amounts and dates that they invested contributions.

What an expert says

We asked Matt Ardrey, CFP, R.F.P. FMA, CIM, portfolio manager and senior financial planner at TriDelta Private Wealth, for his thoughts on Don’s TFSA and benchmarking.

Don’s TFSA benchmarking analysis is a great way that anyone can look at their self-directed investing, and not just because of his results. Most people who pick their own stocks never measure themselves against anything. In my over 25 years as a planner, I’ve found that is one of the biggest gaps in do-it-yourself investing.

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What makes his approach work is that it fits how a TFSA grows. Money goes in every year, so comparing the account with an index over one long stretch would be misleading. Asking what each contribution would have become in an ETF on the same day is the right question, and anyone with a spreadsheet can answer it.

Don’s result should not surprise us. Beating the index is hard even for professionals with research teams and sophisticated tools. Markets price in any edge quickly, fees create a drag, and a few stocks drive most long-term gains, so it is easy to miss them. The average DIY investor has less information, time and discipline, and tends to sell winners too early, hold losers too long and chase what has been hot.

Geographic diversification matters, too. Canadian stocks outperform in some periods and lag in others, a risk that is easy to reduce. But don’t assume the iShares MSCI World Index ETF is a balanced global portfolio. It is currently about 72.5 per cent U.S. stocks. A mix of Canadian, U.S. and EAFE (Europe, Australasia and Far East) ETFs gives better balance, and a more diversified means of investing.

Match the benchmark to what you actually own. A conservative investor holding bonds alongside stocks should not be measured against an all-stock index.

Larry MacDonald is author of The Shopify Story and blogs at Shopify’s Journey