What to do during a Market Downturn or Recession
With the market decline this year and a potential recession, people want to know what they should be doing with their investments and financial plans.
The following are suggestions and actions you can take to help navigate a market downturn.
- With a market decline, it can be tempting to get out and get back in when things look better. However, by the time things look better, the market is normally higher than it was when you moved out, as you have missed the recovery.
- Remember downturns don’t last. In Canada, the average length of a bull market is 41 months, and the average length of a bear market is 10 months. (Source BMO: From June 1960 to Dec 31, 2021)
Automate your Savings: Set up a Monthly Savings Plan
- When investing, consider a dollar-cost averaging (DCA) investment strategy where you invest on a regular basis such as monthly. This strategy is well suited for a market decline.
- Each month as you buy, if the market has decreased, you are investing/buying more of that investment at a lower cost which will help to increase your returns over the longer term.
- If you can afford it, consider increasing the amount of your monthly investments to take advantage of the lower prices.
- If you do not have an automatic savings plan set up currently, consider starting one to take advantage of the market decline and to start the savings habit.
- This savings plan can be used for your RRSPs, TFSAs, RESPs, and non-registered investment savings.
Review your Company Savings Plans
- Review your company retirement savings plans to ensure that you are taking full advantage of the plan, especially if they offer some sort of contribution matching.
- Many companies will contribute money to your company retirement plan as long as you are contributing to the plan as well. I have seen some company plans where if the employee contributes 6% of their income, then the company will contribute 3% (ie: 50% of your savings).
- You should also review your investments in any company plan, and if you have a financial advisor send that information to them along with the investment options for their suggestions.
Pay Down Debt with your Cash
- With the increase in interest rates your debt costs may have increased, so it can make great sense to pay down or pay off your debt if you have the cash on hand.
- If you are paying an interest cost of 6.45% at the top bracket you must earn 12.9% on your money before tax to pay it off. Paying off debt is sort of like a good, guaranteed rate of return on your money.
Complete a Portfolio Performance Review
- The first step is to find out if other portfolios with a similar investment mix have declined about the same as yours.
- If your portfolio has declined more than similar portfolios, do a full review of your investments and asset allocation to find the reason.
Confirm you have a Globally Diversified Portfolio
- Review your portfolio allocation, and confirm the allocation and investments are still appropriate for your requirements.
- A globally diversified portfolio will normally include the following asset classes:
- Canadian EquitiesUS Equities
- US EquitiesGlobal Equities
- Global EquitiesCanadian Income
- Canadian IncomeGlobal Income
- Global Income
- Also, review your specific mix as over time a portfolio can drift to create a larger weighting in the prior best performing asset class.
Review your Tax Strategies
- You may wish to review your investments for any tax loss selling opportunities.
- If the market value of an investment is less than the cost base, you may be able to sell and create an investment loss and reposition that investment.
- You can carry any capital losses back 3 years, and forward indefinitely.
- You can visit HERE for other tax strategies.
If You are Already Retired:
Review your Retirement Plan
- When your retirement income plan was developed, ideally both bull and bear markets were taken into consideration to determine an appropriate investment allocation and spending amounts that could be sustainable over your lifetime.
- You may wish to review your withdrawal rate again and re-run your plan to see what your spending risk may be to determine if any adjustments are required.
Review your Spending
- One thing that you can control is your spending during market downturns. If you are worried, taking less from your retirement portfolio can help in any market downturn.
- You can review your discretionary vs non-discretionary expenses. Perhaps there are some expenses you can reduce and/or defer for a period of time.
BEAR MARKETS HAPPEN REGULARLY
- Since 1956 the Canadian Stock Market has had 12 Bear Markets, which is about one major market decline every 5 years.
- If you are age 30 today, and plan to retire at age 60, you could have 6 bear markets (corrections or downturns) prior to retirement, and 6 bear markets during 30 years plus of retirement.
Unfortunately, market declines and recessions will happen on a regular basis, and therefore your financial and retirement plans must take that into consideration when developing your strategy.
For more information, you can refer to Preserving Wealth: The Next Generation - The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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