What should I do with my money if there’s a recession?
Excerpts of a MoneyTalk article by Ingrid Macintosh, VP, Wealth, TD Asset Management.
As concerns about a recession due to COVID-19 continue to spread, many people are pulling their investments out of the market while planning to jump back in again when they feel conditions are right.
But regardless of whether there’s a recession on the horizon, dwelling on dire economic news distracts us from focusing on the steady, long-term outlook which can ultimately make an investment plan successful.
What is a recession?
A recession is officially judged as two consecutive quarters of negative economic growth. During this period, which can last anywhere from months to even years, unemployment tends to rise quickly and retail sales fall sharply. Recessions are a natural part of how an economy works as it expands and contracts1.
What are common causes of a recession?
There are many ways in which a recession can happen. Some of the main causes of a recession include1:
- Sudden economic shocks, such as a global pandemic
- Excessive debt leading to defaults and bankruptcies
- Asset bubbles, such as inflated stock markets or real estate markets
- Too much inflation or too much deflation
- Technological change which impacts entire categories of jobs
What to do if a recession happens?
After every recession so far there has been an economic expansion that has more than made up for the previous declines. Want proof? From 1962 to this year, Canada has survived four recessions and every single time the economy has come back with strong growth. Market dips can be a great opportunity to get your investment strategy in check.
What happens to my investments during a recession?
Investing isn't a game we can decide to play one day and watch from the stands the next. Studies show that if you miss the four best positive days in the market every year, it can dramatically weaken your portfolio. Always being invested means you can benefit from the power of compound growth over decades. If your goal is saving for a comfortable retirement, you don’t want to miss any chances for great returns. Investing can be a life-long pursuit, but you can’t win when you stay on the sidelines.
Think about your investments this way: a traffic delay can ruin your morning, but if you pull over, you’ll never reach your destination. In the same way, market downturns can become meaningless in the course of a lifetime of investing, provided you stay on the journey.
If GICs are earning less than inflation, moving the bulk of your investments into GICs will actually give you a negative return after inflation. GICs have their place but they don’t have a major role in a long-term growth portfolio.
How to recession-proof yourself
Here are some of the things you can do to protect your finances ahead of a recession2.
- Avoid credit card debt, since such debts will be much more expensive in a recession when budgets are tight
- Pay off your mortgage, as you may find it more difficult to make your payments if your income decreases
- Build your savings in order to have an emergency fund to cover periods of income disruption
- Stay confident and don’t let your emotions get the best of you when it comes to your investments
This content discusses current topics of interest in a general and informational manner only and may not be appropriate in all circumstances. Please ensure that you seek advice personalized for your situation from the appropriate professional, consultant or subject matter expert on the topic of interest to you.
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