TFSA Investors: Why a Market Rebound Could Be as Sharp as the Market Crash

TFSA investors should consider adopting a more active approach if they wish to rise out of this market crash richer than when they entered it!

TFSA investors found themselves in some pretty volatile times. Stocks take the stairs on the way up and the elevator on the way down. But in times of sudden panic, don’t be surprised to see stocks take the elevator back up given the off-the-charts volatility. That means if you sell your stocks, you could get hurt that much harder relative to past market meltdowns.

While it’s a good idea to re-balance your TFSA and take a more risk-off approach, make sure you don’t panic sell stocks based on how beaten up they are. Because if the underlying business is still sound, and the long-term thesis is still intact, it’s these such stocks that could have the most room to run in a rebound.

Remember, volatility goes in both directions.

What’s with the off-the-charts volatility of late?

A global pandemic is enough to cause mass hysteria. But add the rise of passive investing into the equation, and the wild market swings stand to be severely exacerbated.

Dr. Michael Burry, the man behind The Big Short, warned everybody that there’s a bubble in passive investing. While I wouldn’t necessarily call it a bubble, as the components of index funds were never trading at levels that’d be considered bubbly, I would be on alert of the implications of the profound rise of passive investing.

Passive investors don’t see their index funds as pieces of businesses. They see it as an easy way to get in and out of the markets altogether. In a way, index funds are both a blessing and a curse, especially for passive TFSA investors.

This is arguably the first significant panic we’ve had in an era where passive investing has become so popular. And it’s led to more pronounced single-day moves, with the circuit breaker being triggered on what seems like the daily!

Passive investing also has major liquidity problems and could be a major reason why we suffered a cash crunch amid the market turmoil.

How TFSA investors can take advantage of the rise in volatility

Passive investing isn’t going anywhere. When the panic is over, and the coronavirus is eradicated, they’ll buy up index funds in droves. And that could lead to something unprecedented — a market rise that’s as sharp, if not sharper, than a downturn.

Circuit-breaker breaking moves in panics have become the new norm. Fortunately, for stock pickers, that’s a good thing because it allows us to spot individual businesses that are priced at considerable discounts to their intrinsic value.

How to react to the sudden market crash?

Don’t sell your index funds. They’re still great for the long term. Don’t sell anything unless you’re in the right state of mind. But if you consider yourself a passive investor, do adopt a more active approach so you can grab the bargains and steer clear of toxic stocks that could lead the charge lower.

Look to high-yield dividend stocks that suddenly became too cheap to ignore. Think about the Canadian banks or utilities like Fortis that shouldn’t have sold off in a market that’s anything close to being rational.

Foolish takeaway for TFSA investors

It’s time to get active with your TFSA. As we’ve witnessed over the past few weeks, safe havens aren’t as safe as they used to be, and wild swings in the market have the potential to move in either direction. Record-breaking declines followed by record-breaking rallies are the new norm. As such, there’s never been a better time for TFSA investors to be active.

Fool contributor Joey Frenette owns shares of FORTIS INC.

More on Investing

Concept of multiple streams of income
Dividend Stocks

Passive Income: How Much Do You Need to Invest to Make $400 Per Month?

This fund's fixed $0.10-per-share monthly payout makes passive-income math easy.

Read more »

traffic signal shows red light
Investing

The Red Flags The CRA Is Watching for Every TFSA Holder

Here are important red flags to be careful about when investing in a Tax-Free Savings Account to avoid the watchful…

Read more »

senior couple looks at investing statements
Retirement

Canadian Retirees: 2 High-Yield Dividend Stocks to Buy and Hold Forever

Add these two TSX dividend stocks to your self-directed Tax-Free Savings Account portfolio to generate tax-free income in your retirement.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2026, as Donald Trump Might Ease Cannabis Restrictions?

Down over 99% from all-time highs, Canopy Growth stock might recover in 2026 if the Trump administration reclassifies cannabis products.

Read more »

Retirees sip their morning coffee outside.
Retirement

Retirees: 2 High-Yielding Dividend Stocks for Solid TFSA Income

Do you want tax-free, predictable retirement income? These two high‑yield mortgage lenders can deliver monthly dividends that quietly compound inside…

Read more »

Business success of growth metaverse finance and investment profit graph concept or development analysis progress chart on financial market achievement strategy background with increase hand diagram
Dividend Stocks

2 Dividend Growth Stocks Look Like Standout Buys as the Market Keeps Surging

Enbridge (TSX:ENB) stock and another standout name to watch closely in the new year.

Read more »

voice-recognition-talking-to-a-smartphone
Dividend Stocks

How to Turn Losing TSX Telecom Stock Picks Into Tax Savings

Telecom stocks could be a good tax-loss harvesting candidate for year-end.

Read more »

Person holds banknotes of Canadian dollars
Bank Stocks

Yield vs Returns: Why You Shouldn’t Prioritize Dividends That Much

The Toronto-Dominion Bank (TSX:TD) has a high yield, but most of its return has come from capital gains.

Read more »