TFSA Investors: Avoid The Biggest Mistake if the Market Crashes Again

When it comes to stock, impulse selling can be just as dangerous as impulse buying. That’s why it’s typically better to follow an investment strategy and not get caught in a sell-off frenzy.

| More on:

Human beings are of course emotional creatures. No matter how logical we become and how systematically we approach life, it’s nearly impossible to disregard human emotions completely from our decision-making process. That’s why we have laws, so we won’t be swayed by emotions and do what’s right. But it’s very difficult on a personal level and requires a lot of discipline.

Fear tends to be one of the most potent forces behind a lot of our emotions. It nudges us to make wrong impulsive decisions. This is something you see a lot in the stock market. The fear of losing everything when the market is going down is enough to force people to act without thinking. They make mistakes, and one of these mistakes can be very costly.

The biggest mistake

One of the biggest mistakes you can make during a market crash is to exit your position at a loss. You might see a company declining by 20% or 30%, and you might think that instead of losing everything, you can mitigate your losses, even it means selling around the time when the company has bottomed out.

Something is better than nothing, right?

Wrong. This is one of the biggest mistakes investors make. It erases years of growth in one day. But when you see everyone selling, you are tempted to join the selling frenzy. You might sell when the company has hit rock bottom (or is about to hit rock bottom). It’s a mistake, but it has a proper rationale behind it, and that’s how you have to counter it: by rationalizing your fear regarding the companies you’ve invested in going bankrupt.

You can look into the company’s assets, balance sheet, and what measures it has taken to ensure that it stays afloat. Look at Air Canada, it’s bleeding out millions every day, and it’s still far from bankruptcy. Suncor slashed its dividends but haven’t eliminated them. Even factors like government subsidies and bailouts should be taken into account before you sell off a company at a loss, just because everyone else is doing it.

Another market crash

Rather than brutalizing your portfolio with your own hands during the next crash (by selling stocks at the bottom), you can use the market crash to strengthen it by adding stock like Capital Power (TSX:CPX) in the mix. This Edmonton-based company has a market cap of $3.1 billion and is currently offering a very juicy yield of 6.89%. While the payout ratio is not ideal, it’s safe enough.

A monthly dividend payer like Capital Power can be a very profitable addition to your TFSA investments. Even if you invest less than one-third of your Tax-Free Savings Account (TFSA) into the company, that is, about $20,000, you can start a monthly dividend income of about $114 that could help you take care of a few small expenses.

Foolish takeaway

Controlling sentiment, especially when the whole world and everyone around you are panicking and uncertain about the future, is difficult. That’s why it’s important to follow an investment strategy, which includes market crashes and recessions. It doesn’t have to be set in stone, and you can modify it as you learn more, but having a plan or certain guidelines can go a long way in preventing you from making impulsive investment mistakes.

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 Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold Forever

Here are 2 TFSA-worthy Canadian stocks. Which one is a good buy for your TFSA today?

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »