TFSA Strategies: 1 Investment Is All You Need to Build Wealth in This Volatile Market

Why the BMO Low Volatility Canadian Equity ETF (TSX:ZLB) is a staple for investors in these ridiculously volatile times.

| More on:
Volatile market, stock volatility

Image source: Getty Images

As Foolish investors, we’re all about long-term investing with little to no consideration for shallow short-term forecasts that are regularly the main topic of discussion on most financial television shows.

Yes, every investor wants to know where the markets are headed next, especially after a big down day. But unfortunately, nobody, not even the most seasoned economist, knows with any degree of certainty how the markets will fare over the near term.

Warren Buffett, the greatest investor of our time, is humble enough to acknowledge that he doesn’t know what the markets are going to do over the next week, the next month, or even the next year. The sooner investors stop trying to time the markets, the sooner they can get out of their own way and start to really build wealth using TFSAs.

With securities held within a TFSA, you’re off the hook for taxes on your capital gains and domestic dividends. And if you reinvest your dividends, you can unlock the full power of long-term tax-free compounding, which can snowball your wealth quicker than you’d ever imagine possible.

Right now, unexpected events are moving this market. We’re hearing less about the earnings of individual companies and more about macroeconomic trends. So, like it or not, the markets over the short term have become a casino.

The funds within your TFSA are precious and shouldn’t be gambled on some analyst’s prediction of where he thinks the markets will be in a week or two. While it’s tempting to want to take action in response to the volatility we’ve faced over the past few weeks, doing so will only increase your commission bill and cause you to miss out on potential recovery days that nobody will see coming.

All it takes is missing out on a day or two to stunt your returns severely.

So, if you’re not sure how to react to such elevated levels of market volatility, the best course of action when it comes to your TFSA is to take a hands-off, risk-off approach with ETFs like the BMO Low Volatility Canadian Equity ETF (TSX:ZLB), a “smart beta” ETF that I’ve praised numerous times over the past few years.

I’m a fan of the ZLB not just for the low management fees, but also for the compelling strategy that has delivered terrific results relative to the benchmark.

It’s a more prudent way to invest than index funds, as you’re getting lower beta securities and a strategy that doesn’t entail managers trading in and out of stocks over the short term due to subjective reasoning.

In this kind of market, where the markets are a roller coaster ride, you’ll get some much-needed smoothing thanks to the ZLB’s low-volatility constituents. While the ZLB isn’t immune from going down, it will take a lot more to send the ETF down by the triple digits than it would the broader indices, which now appear to be on unstable footing.

As others jump in and out of the markets based on meaningless short-term noise, the best thing you can do for yourself is to tune out and stay invested in ETFs like the ZLB. Volatility is the new normal, so investors need to respond accordingly, not by selling stocks for bonds, but by reducing one’s beta to reduce volatility without reducing potential returns.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns shares of BMO Low Volatility CAD Equity ETF.

More on Investing

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »