In 2020, our world was cascaded into a global pandemic that upended life as we knew it. While COVID-19 may no longer dominate the headlines, its lingering side effects continue to impact us, particularly the stress of perpetual uncertainty. Whether it’s climate change, political instability, or, most pressing for many, financial concerns, uncertainty has become a significant source of stress for Canadians.
As the word recession has been thrown around repeatedly over the past year, many Canadians are realizing that economic downturns are more than just a topic of conversation, but are something they need to plan for. A recent Financial Post article reads, “a recession is headed in Canada’s way, and it’s likely coming sooner than you think.”
Indeed, economic concerns are intensifying. According to CPA Canada and BDO Debt Solutions, 83% of Canadians have started adjusting their financial strategies due to the current political and economic climate, and it is not just the numbers that are making people react. Li Zhang, a financial leader at CPA Canada, explains, “The financial caution we’re seeing isn’t just about inflation – it’s about uncertainty.”
While everyone is looking for ways to recession-proof their finances, the question remains: Should you be doing the same?
The Dreaded Word
The word recession strikes fear in the hearts of many, and for good reason. A recession is commonly defined as two consecutive quarters of negative economic growth, but in reality, it is much more complex. Various factors, loopholes, and exceptions are at play. Even though it’s difficult to label the current state of the economy as a full-blown recession, significant signs are pointing toward its potential effects.
One factor expediting the situation is the ongoing U.S. tariff war and policy shifts, which present fresh economic threats. These developments, paired with uncertainty surrounding global markets, contribute to the uneasy financial atmosphere many Canadians are facing.
The Factor Of Uncertainty
Even though uncertainty has become somewhat normalized in our lives, the effects on people’s financial behaviour are significant, leaving many individuals to lose track of their long-term financial goals. While in a state of stress and turmoil, the act of dipping into savings or making impulsive financial decisions may seem like the safest option, but it is a choice that can hurt you and your finances in the long run.
Sticking to your long-term plan and staying invested is vital no matter what the economy is doing. Keeping your investments intact during uncertain times often leads to greater rewards in the future. After all, to experience the highs of the economy, we must also endure its lows. By navigating this challenging period with patience, focus and discipline, you can find your way out of this season with financial security and a new appreciation for impulse control.
Preparation = Protection
Whether it’s saving for big purchases, planning for retirement, or managing day-to-day expenses, preparation is essential to maintaining control of your finances.
As inflation continues to spike and the cost of living rises, it is crucial to beef up your savings. Having a financial cushion can protect against unexpected challenges. Setting up an emergency savings fund will provide that confidence not just for times of economic uncertainty but for everyday life – enabling you to cover unexpected expenses without needing to liquidate investments, dip into your retirement savings, or take on debt. After all, unforeseen circumstances are always just around the corner, and being prepared ensures that you stay on track no matter what comes your way.
A good rule of thumb is to stash three to six months’ worth of living expenses in your emergency fund to stay prepared. Take the time to review your income, spending, and payments to determine how much you can save, then set achievable savings goals. This way, you’ll have something to rely on when times get tough, without needing to dip into your investment prematurely.
Maintaining a strong cash reserve is also a good way to secure assets; keeping a portion of your portfolio in cash or cash equivalents like a high-interest savings account ensures you can take advantage of market opportunities during downturns.
Don’t Run, Diversify!
It is easier said than done, but even though watching investment portfolios dip may entice you to sell investments at a loss, it is wise to wait until the market stabilizes. Historically, recessions have presented buying opportunities for patient, long-term investors. By staying the course, you can take advantage of “buying the dip” by purchasing quality stocks when they are temporarily lower in value.
For those with a long-term investment horizon, downturns can offer a chance to invest with less risk. One key strategy to take advantage of this is diversification. Bonds are a great way to lower risk and provide liquidity during uncertain times. Data backs this up too; in 2023, two and five-year Government of Canada bonds offered the highest yields since 2007, proving that fixed-income investments can still offer opportunities during a downturn.
Focus On What You Can Control
While external factors like tariffs, policies and economic uncertainty may feel out of your hands, there is still plenty you can control, starting with personal finances. By turning your focus to budgeting, savings, risk assessment and avoiding impulsive financial decisions, you can stay committed to your long-term financial goals. One of the best ways to weather the storm is to stay invested, so avoid the temptation to sell or invest in a panic.
While navigating a recession, strategy is key. Given the recurring nature of economic downturns, consulting a financial planner with experience in economic uncertainty can help. Assisting in assessing your current financial situation, a trusted expert can realign your investment strategy with your goals and provide support during turbulent times.
Remember, recessions are a natural part of the economic cycle, and though they come with challenges, they also present opportunities for those who stay disciplined. So stay calm, stay invested and trust that your financial goals are within reach.
Looking for support during the economic season? Contact a trusted financial advisor at RaeLipskie to affirm your goals and boost your certainty: https://raelipskie.com/contact/