By iA Private Wealth, December 28, 2022
There’s been a lot of talk lately about an economic recession. Technically, a recession is a significant and prolonged economic decline. It’s generally defined as two consecutive quarters of negative economic growth, as measured by a country’s gross domestic product. When a recession occurs, you’ll likely feel its impact on your finances – there will be fewer jobs, lower wages and more businesses tend to fail.
What’s the impact of a recession?
Many people fear recessions, given the expected economic weakness and instability. If economic growth slows and debt piles up, businesses may pause expansion plans and lay off a portion of their workforce. High unemployment curbs spending as many individuals and families manage their finances more cautiously.
In the early stages of a recession, we encounter rising prices on goods and services as inflationary pressures mount, causing higher interest rates and decreased purchasing power. Trying to make money stretch and maintain their quality of life without accumulating too much debt, people often forego discretionary expenses like travel and dining out, which slows the economy in general and negatively impacts businesses in those industries.
How to manage in a recession
Keeping a close eye on debt is important in recessionary times. If interest rates are high (and rising), you could face larger payments on your credit cards, mortgage, loans and other debts. Try to reduce the amount you owe and watch your spending to avoid incurring excessive interest charges. Cooking at home, walking or taking public transit instead of driving, and cutting back on costly entertainment are some ways to lower your bills.
Investing in recessionary times
Since the economy slows in a recession, stock markets often decline to reflect diminished prospects for business growth. It’s tempting to sell during a severe market downturn, but that’s usually an unsound strategy. Your Investment Advisor has worked with you to build a customized long-term plan to meet your financial objectives. Reacting rashly to short-term market declines may keep you from reaching your goals by locking in your losses and eroding your wealth.
Remember that recessions come and go, and the overall market’s long-term trend is upwards. With help from your advisor, you can stay focused on your financial goals and ignore short-term market challenges. Depending on your circumstances, risk tolerance and time horizon, your advisor may even recommend investing more during a market downturn when prices are lower, so you can be better positioned to benefit when the economy rebounds. It’s also generally wise to hold a well-diversified portfolio across asset classes, industries and geographies, which may help reduce portfolio risk while enhancing long-term returns. A skilled Investment Advisor can guide you through the economic cycle – including recessionary periods.This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.