Planning for a Recession

Oct 16, 2019 | Michelle Nickel


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Preparing for an economic downturn, indicators and our process.

PLANNING FOR A RECESSION

A market downturn doesn’t bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers is a correction not an opportunity.

-Warren Buffett

Since the start of the summer, we have been fielding questions about the health of the global economy and concerns around a possible recession. Recessions are a normal and healthy part of the economic cycle, and, for long term investors, offer opportunity amidst the turmoil. As we view economic recessions and accompanying market corrections as a regular part of our environment, and we think it is impossible to consistently time the markets, we plan for recessions on Day 1 of managing a portfolio. 

                   

To help give a lay of the land, RBC maintains a “recession scorecard” that monitors a number of leading indicators. Currently it looks like this:

Four of the six indicators remain firmly in expansion territory, however we no longer have the “all clear” that was signaled in recent years.

In addition to monitoring RBC’s recession scorecard, here are some of the things we do on an ongoing basis to ensure our client accounts are prepared for changes in the market:

  1. Structure each portfolio to meet long term goals, and to stay within the client’s risk tolerance.
  2. Focus on quality holdings; look for companies that have durable competitive advantages, strong management teams, and generate strong and growing cash flows. Maintain consistency in the process for adding and removing securities to and from the portfolio.
  3. Rebalance accounts to trim winners and add to quality laggards, in the case of balanced accounts trim equity weights back to target as the market rises.
  4. Ensure that fixed income will provide a buffer in down markets, don’t “reach for yield”.
  5. Work to obtain the most cost effective implementation of the portfolio on behalf of clients.
  6. Minimize tax through use of registered accounts, capital gain/loss management, holding companies, and other tax planning opportunities.
  7. Take with a grain of salt negative business headlines that are designed to sell newspapers not help you navigate your long term financial plans.
  8. Remember that the bear markets of 2000 and 2007 started with great euphoria in the investment community; that level of euphoria is arguably not present today.

In some cases we will build a small cash buffer, recognizing portfolios may underperform if the market moves significantly higher while we are underinvested. We also encourage clients to take advantage of our financial planning services. Our financial planners can highlight opportunities to minimize taxes, plan for the unexpected, and utilize debt appropriately.

Please feel free to contact us with any questions and concerns regarding the markets, your investments, or your financial plan.

-Michelle