Recessions may seem daunting, especially when you need to consider all your expenses relative to income. But they may also present lucrative opportunities for investment returns down the line. Understanding how to position your investments during a recession is crucial to making the most of a difficult period and enhancing your long-term financial plans.
A recession is a period of economic decline characterized by at least 2 consecutive quarters of decline in GDP. Recessions can last months or even years, depending on their severity. Other indicators of a recession include:
- Lower employment rates
- Reduced consumer demand
- Decreased manufacturing production
There are several causes associated with recessions. In many cases, recessions are caused by a sudden crisis that impacts the economy, like a burst housing bubble in 2008 or the global COVID-19 pandemic in 2020.
High inflation rates can also cause recessions. Rising costs of goods sold mean higher prices. An upward price trend means consumers don’t purchase as much, which can trigger a recession. Central banks try to control inflation by raising interest rates.
Central banks like the Bank of Canada play a crucial role in recessions because they set Canada’s monetary policy, which aims to regulate the value of money.
The Bank of Canada or the finance minister is responsible for declaring a recession—and doing something about it from a monetary perspective.
Tips for Investing During a Recession
Investing during a recession doesn’t have to be a challenge. By using the resources at your fingertips and seeking advice when needed, you can position yourself to make gains in the long run. There are a few tips for arranging your portfolio to protect your existing assets and explore avenues for future profitability.
Look for Healthy Companies
Evaluating companies’ financial health seems like the type of advice you should always follow in your investment strategy, but there is a reason it’s imperative during a recession. Seek out companies that maintain strong balance sheets during an economic downturn—strong balance sheets signify the company has a good business model and is in a position to make gains in the future.
Be aware of companies that have lots of debt on their balance sheets. During a recession, decreased revenue means companies can struggle to pay off their debts. A debt-burdened company can risk bankruptcy, which doesn’t bode well for your long-term return on investment.
Cash is King
Another part of evaluating companies’ balance sheets is looking at cash flow. Cash flow refers to the inflow and outflow of money from a company.
Agile companies can take advantage of opportunities in stressed finances and tough economic times. Generally, any cash flow is healthy. Healthy cash flow indicates a company’s agility.
Cash is also essential to consider in your own portfolio. In the same way companies with healthy cash flow can take advantage of opportunities, so can individual investors. In anticipation of recessions, it may be a good idea to position some emergency cash savings in your portfolio.
Think Long Term
Historically, recessions can create investment opportunities because an economic downturn usually means you can buy stocks at a low price. Stock prices may rise gradually as the economy shows signs of recovery. It could be years before you see a notable return on your investment—but patience can pay off.
Long-term investing can be challenging without the promise of quick returns. Avoid checking your portfolio daily, weekly, or monthly. Consider checking your investments every quarter to six months to see the long-term gains, and also avoid making hasty decisions if your assets take a slight dip.
Defend Your Assets
Investing in mutual funds or an exchange-traded fund is often considered less risky than investing in individual stocks. Funds are also a convenient way to diversify your portfolio and defend it from widespread economic downturns since the risk is spread across many companies.
Defending your assets also means making educated investments. Blue-chip companies are usually reliable, especially those in industries like consumer packaged goods and utilities. Stocks considered “high growth” are often overvalued—their price is tied to prospects, not profit.
Growth stocks typically don’t do well during a recession; however, as the economy begins signalling recovery, you can look for opportunities in these stocks to make a return in a bull market.
Work with a Financial Advisor
A financial advisor is someone certified to give you advice on reaching your financial goals. You might feel alone during a recession, like you’re in a state of survival, taking care of yourself and your family’s finances. A financial advisor can help you weather the storm, weigh your options, and take advantage of opportunities.
Qopia Investments is a trade name of Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Qopia Investments is registered to advise in securities and mutual Funds to clients residing in Alberta, Ontario, Saskatchewan, and British Colombia. This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. The views expressed are those of the author and may not necessarily be those of ACPI. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
Investment products are provided by ACPI and include, but are not limited to, mutual funds, stocks, and bonds. Non-securities related business includes, without limitation, fee-based financial planning services; estate and tax planning; tax return preparation services; advising in or selling any type of insurance product; any type of mortgage service. Accordingly, ACPI is not providing and does not supervise any of the above noted activities and you should not rely on ACPI for any review of any non-securities services provided by
Investment products are provided by ACPI and include, but are not limited to, mutual funds, stocks, and bonds. Non-securities related business includes, without limitation, fee-based financial planning services; estate and tax planning; tax return preparation services; advising in or selling any type of insurance product; any type of mortgage service. Accordingly, ACPI is not providing and does not supervise any of the above noted activities and you should not rely on ACPI for any review of any non-securities services provided by Qopia Financial.
Any investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. The information contained does not constitute an offer or solicitation to buy or sell any product or service. Past performance is not indicative of future performance, future returns are not guaranteed, and a loss of principal may occur. Content may not be reproduced or copied by any means without the prior consent of the author and ACPI.Disclosure of commissions in mutual funds in accordance with NI 81-102 (15):“Commissions, trailing commissions, management fees and expenses all may be associated with mutualfund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, theirvalues change frequently, and past performance may not be repeated”.
Financial Planner of Qopia Financial / Portfolio Manager of Aligned Capital Partners Inc.
I grew up in a small town south of Ottawa, called Metcalfe, ON and graduated from the University of Ottawa in 2012. My love for sports is a major reason why I place so much importance on performance and this includes performing for clients. Those closest to me would describe me as straightforward, but also generous, driven, and dynamic. As a coach, teammate, and partner of my clients, I want to see that everyone wins.
Since 2017, I have been working as a Financial Advisor and have always had a natural affinity for business and investments. In early 2021, I completed my Chartered Investment Management (CIM) ®designation, which has helped me select and recommend the highest quality investments for my clients. My goal is to provide the most competitive, transparent, and cost-effective Estate Planning and Investment Management service in Canada, which focuses on Tax minimization, Growth and Protection.
I don’t do it alone. At Qopia, I have a team of dedicated administrative staff, in-house analysts, insurance specialists, lawyers, accountants as well other Financial Advisors with whom I can consult. I pride myself on striving to deliver the industry’s top service for my clients.