It’s been an interesting year for investors. Given the state of the global economic outlook, there has been a lot of talk of an impending recession, or even that we’re already in one. Understandably, this may leave you feeling nervous. Recessions may elicit fear in us, as we might expect a slower economy to affect both our portfolios (through lower investment values) and broader lives (through less income or a job loss). The implications of a recession tend to play games with our emotions and often drive us to make bad decisions.
What exactly is a recession? The technical definition is two quarters (six months) of negative economic growth, measured by a declining gross domestic product, or GDP. GDP is the total market value of the new goods and services produced during a specified period. More simply, a recession describes a shrinking economy rather than a growing one.
As counterintuitive as it may sound, recessions can be a great time for investors, because prices can become lower than they normally are. That gives your investment manager an opportunity to buy assets more cheaply and, in so doing, sow the seeds of future growth. The problem is that recessions create uncertainty around the future and thus it does not feel like a great time to invest, so some investors are tempted to pull money from their portfolios. This typically leads to selling at depressed prices, locking in losses.
The best thing we can do is to be prepared, should we find ourselves in a recession, by having a few rules in place to help us make better decisions and know what to do. Here are a few habits that can help protect your savings in a slowing economic environment.
- Take some time to make sure your financial position is secure. In a recessionary market, it’s a good rule of thumb to make sure you have a cash buffer and that your portfolio includes exposure to assets that can thrive in a depressed environment. If you are unsure about this, take some time to check in with me to make sure your total financial position is still appropriate for your goals.
- Remember the rules of wealth attainment. Namely, save early and often, and invest your savings in a portfolio that reflects your risk tolerance. Then let the power of compounding grow your wealth faster than inflation. In a recession, fear may drive some people to stop saving and/or choose a more cautious portfolio. But, as we’ve said, some of the best returns historically have been recorded during rebounds from recessions. Taking a break from markets can mean missing out.
Given the current environment, staying invested can be easier said than done. I encourage you to give me a ring if you have any concerns, or if your financial situation has changed and you think that warrants a rethinking of your investments. Regardless, save every little bit you can, as we’ve discussed.
- Don’t sell out. We all know the old adage, “Buy low, sell high”. Yet, when fear drives you to move to a more conservative portfolio, you sell stocks low (again, locking in losses) and buy bonds high (increasing the chance that they’ll return less or even lose money over the long run). The start of a recession is not the time to liquidate your investments. Depending on your time horizon, you most likely have enough time to ride out short-term stock price drops if you stay focused on the long term.
A recessionary environment could even be a time to increase your contributions to your portfolio. By saving when the market is down, you’ll likely buy low. This brings me to my next point.
- Stay the course by averaging in. With uncertainty in the air, holding together your finances can be tough. Therefore, it’s a good idea to set accounts on autopilot to avoid the temptation of hoarding cash under your mattress. Automated savings plans take the guesswork and hesitation out of your present self and help attain your financial goals.
- Think long-term and keep concentrating on your goals. It’s important at all stages of the market cycle to think about the goal of your investment portfolio. Ignore short-term performance in favour of your progress toward your goals. If you do that consistently, it’s really going to help you to continue investing through this or any recession.
Above all, let’s remain focused on the long term and avoid being spooked by the “R word”. We should all expect at least one recession over our investment horizon (likely many more) so we should try to make the most of it.
As always, please let me know if you would like to discuss this or anything else in more detail.
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