What do you do with your investment portfolio when you hear the infamous “R” word – recession? It’s easy. Just follow the three Rs: Review, rebalance and relax.

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Recession: A nasty nine-letter word

The strong post-pandemic economic boom – combined with global supply chain issues and massive increases in energy prices – has caused a surge in inflation over the last year-and-a-half to levels not seen since the 1980s. In response, almost every major central bank the world over has scrambled to increase interest rates to tamp down demand and regain control over prices. So much so, in fact, that the Governor of the Bank of Canada (BoC) recently stated that it was better for our long-term economic well-being to use restrictive monetary policy to induce a recession – where the economy ceases to grow or even contracts for two consecutive quarters or more – than risk allowing inflation to continue to ravage consumers, government and businesses.

To fight inflation, the BoC has raised its benchmark rate eight times, lifting it from 0.25% back in the spring of last year to 4.5% today. While the rise has been sharp and rapid, it appears that recent economic conditions have weakened enough to allow the BoC to pause, or perhaps even end, its tightening course.

However, unfortunately most economists now agree that sharply higher rates, while working to bring down inflation from its peak of over 8% in February 2022 to today’s 5% level, a recession is likely to be inevitable. Whether that recession is mild or severe is still open to debate, but increasingly the consensus appears to be that a “soft landing” – where the economy slows but doesn’t enter a recession – has become increasing unlikely.*

“R”-proofing your portfolio

Already suffering from rising interest rates, and now anticipating a recession, both bond and equity markets turned negative and volatile in 2022, reflecting the uncertain and bumpy road ahead. While 2023 started off on a positive footing, equity markets have largely given back this year’s gains (fortunately, bond markets have done better as interest rate increases have stabilized).

Volatile markets often generate strong emotional reactions in investors, sometimes prompting them to veer off course from their investment plans. This can lead to common pitfalls like taking inappropriate and ill-advised risks, buying high and selling low, and moving to “the sidelines” (i.e. cash) to avoid losses, thereby missing out when markets recover.

Similarly, reacting to the “R” by altering your investment plan is rarely the right move. Instead, investors would be well served to follow the three Rs:

• Review: Volatility can spur some difficult-to-manage emotions, and to questioning one’s goals and the plan to achieve them. Does your investment plan still align with your goals? Is your risk profile still accurate? These are important questions and concerns to review with your Investment Counsellor if your financial or personal circumstances have changed.
• Rebalance: Your portfolio should be balanced in a way that maximizes your investing efforts to help achieve your goals, while reflecting your appropriate risk profile.
• Relax: Once you’ve reviewed and rebalanced, if and as necessary, you can relax with confidence that you are on the right track to your goals.

It’s important to keep in mind that recessions are usually short-lived events, and that your portfolio is designed to achieve long-term goals – like retirement – that are in the future and that stretch over many years. So changing your long-term plan as a result of short-term challenges is rarely advisable.

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