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.
Recession: the 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 to levels not seen since the 1980s. In response, almost every major central bank is scrambling 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 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 take hold.
To fight inflation, the Bank of Canada’s overnight rate has climbed from 0.25% back in the spring to 3.75% today – a historically sharp and rapid increase. And the hikes are likely to continue. As a result, most economists now agree that a sharp economic slowdown is coming. The hoped-for “soft landing” – where the economy slows but doesn’t enter a recession – is becoming increasing unlikely.*
“R”-proofing your portfolio
Already suffering from rising interest rates, and now anticipating a recession, markets have turned negative and volatile in 2022, reflecting the uncertain and bumpy road ahead. 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 investment pitfalls like taking inappropriate and ill-advised risks, buying high and selling low, and moving to “the sidelines” (i.e. cash), thereby missing out as the 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 us 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. If your portfolio has drifted out of the balance as a result of market movements or other factors, speak with us to review and rebalance it, as necessary.
- 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.
Remember, recessions are usually short-lived events, and 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.
*Proof Point: Canada’s recession to arrive earlier than expected, RBC Economics. October, 2022.
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