Managing Your Money

Over the holidays I noticed a reoccurring theme of recession fears. At social events with friends and family it would always come up in at least one conversation. From a cousin hesitant to buy property due to recession fears, to a business owner friend holding back on company investments to keep safe cash on the side lines. In technical terms, a recession occurs when two or more successive quarters (six months) show a drop in gross domestic product (GDP). A survey was just released by The Conference Board indicating that “the world’s chief executives view the risk of a recession as their biggest external concern in 2020”. A similar survey by Duke University found that “more than half of U.S. businesses expect a recession to occur in 2020”.

While much of last year was spent with recession alerts on the rise, things are looking quite a lot better today than they did three or four months ago. The economy is heading into 2020 with steady expected growth after interest rate cuts in 2019, and the odds of a recession, in the short term at least, have dropped significantly since last year. This is good news; however, there are still issues that need to get resolved. With trade talks still in the works, a US election on the horizon, and rising tensions in the Middle East, we’re not out of the woods.

“Forecasting just when a recession will start is a notoriously difficult task”

How long will recession fears loom? When will a recession hit? How long could a recession last?  Forecasting just when a recession will start is a notoriously difficult task, so your guess is as good as mine. What I can tell you though, is that eventually we will enter a recession. It’s a normal part of the economic cycle, and we haven’t had one in a long time. But that being said, most recessions are really not that painful – they’re not all like the Great Depression of the early 1930’s, or the Great Recession of 2008.  The economy slows down, and life goes on, and then the economy picks up again. See chart below.

economic cycle  - Recession concernsThe media often blows fears such as recession out of proportion, stirring up economic anxiety. Some even believe that as these fears become widespread, and consumers worrying about recession reduce their spending, it can actually spark a downturn and become a self-fulfilling prophecy. This article is not meant to induce fear or anxiety, but to suggest preparedness. Being prepared for a recession can take away a lot of the fear and worry and allow you to ease through it smoothly.

Businesses are usually the first to be affected by economic downturn. This eventually trickles down and leads to unemployment issues, falling real estate values, dropping stock prices, and lower interest rates, and that’s when the average person, working and retired, can start to feel it. Consider the following thoughts in preparation for some bumps in the road. Do what you can do to prepare, and then stop worrying, the rest is out of your control.

Retirement Income Stability – If you’re retired and living partially or fully off your savings, consider how your income is being generated. Recession eventually pushes interest rates lower, can reduce dividends and drops stock values. This in turn can affect your income or force you to draw down capital. Speak to your wealth manager to proactively manage these risks before they happen. Ensuring there is always a safe, stable place to draw income from will prevent you from being forced to sell while investments are down, allowing them to recover over time.

Employment Income Stability – If you’re working, consider the stability of your job. Some employment sectors are more recession resistant than others. Feel things out at work and try to sense if any layoffs are coming. Prove yourself to be of high value and indispensable. Establish relationships with recruiters and head-hunters if you feel your job security might be shaky. Be open to relocating, not necessarily as a last resort, but possibly for better opportunities and new experiences. And most importantly, make sure you have extra savings put aside in case of job loss, so you won’t have to dip into your retirement savings. Using retirement savings should be a last resort as this can have devastating effects on future values and trigger very expensive tax bills.

Lifestyle Changes – Having a clear picture of what your current lifestyle costs and establishing which expenses are essential vs those that are non-essential, can give you some wiggle room during a recession if your income is affected. Cutting back on dining, entertainment, extracurricular activities and vacations are usually the first things to go. Expect an adjustment period but knowing how much you CAN cut back your spending without cutting the necessities can be very reassuring.

Home Values – during recession real estate values fall, and foreclosure rates increase. If you’re in the market for a home, make sure it is well within your budget. If you have a mortgage, find out what your amortization options are in case you need to lower your payment during tighter times. As mentioned above, put some extra money aside as a cushion in case income drops during a recession.

“Being prepared for a recession can take away a lot of the fear

and worry and allow you to ease through it smoothly”

Investment Portfolios – When recession hits, stock markets often take a dive. Many strategies can be used to protect and profit from this. Ensure your portfolio is well diversified – not having all your money in the same type of asset class. Make sure most of your portfolio is in high quality investments. Even if you enjoy taking risks with investments, leading up to a recession may not be the best time to do it. Always keep some short-term money ready to take advantage of opportunities. Psychologically, when you have money aside to invest and can take advantage of a discounted stock market, the market crash doesn’t feel so bad. As an example, December 2018 was one of the worst months for the stock market since the 2008 recession. However, in retrospect it turned out to best one of the opportunities just ahead of a very strong 2019. Keep what you need for short-term income needs or expenses in a low risk investment to ensure that you won’t have to sell while things are down. Balance your traditional investments with uncorrelated ones. Investing in uncorrelated asset classes will generally help to reduce the volatility and boost your overall return. Ultimately, having a high-quality investment portfolio and a solid investment plan should give you reassurance. Having the time to wait out a recovery is a key to long term financial success.

Planning and being prepared is a surefire way to reduce stress and anxiety. Discuss your recession concerns with your wealth advisor and find out what plans or strategies they have in place to weather whatever storm may hit.

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 24 years of experience working with retirees and pre-retirees. For a second opinion, private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or Lynn.MacNeil@RichardsonGMP.com. Or visit our website at www.EphtimiosMacNeil.com

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