Canadian Investors are in a difficult situation now. Markets are extremely volatile and the situation isn’t likely to change soon because of the recession. Experts also warn that this global economic recession might last a while.
Therefore, investing has gotten riskier. In the meantime, bonds that are safe from market volatility don’t offer good yields. So investors must make a difficult decision on whether to take a risk or to hold their money for now.
There are some interesting savings options that might be a good alternative to expanding your investment portfolio now.
The Recession of 2020 and Its Implications for Investors
The recession of 2020 has barely started and it already is one of the worst in recorded history. Experts in the economy often compare it to the Great Depression, which has all but devastated the world. This recession, fuelled by the coronavirus pandemic, might have even more long-lasting consequences.
That said, pulling out of your investments completely is not the best idea. There is always some inherent risk and volatility in the markets. And while it’s getting worse during a recession, it’s not necessarily a disaster for investors.
In order to choose the best strategy for this difficult time, you need to consider the fact that the recession will last. This means that if a part of your investment portfolio crashed now, it will take time to recover.
The global economy is restarting now, which is a good sign. However, because of the lockdowns, especially in China, levels of both global manufacturing and consumption are lower. Factories closed during the pandemic will need months to get back to their pre-coronavirus production levels. It’ll take even longer to produce sufficient quantities of materials and parts to recover what was lost.
In the meantime, the increasing rate of unemployment is hindering the consumer’s ability to buy those goods that are returning on the shelves. As consumption is the main drives of the global economy, you can see how it will need time to recover fully.
However, you can be absolutely sure that it will, indeed, recover. Stock markets, Canada’s included, are already showing a marked improvement. It’s not yet at the pre-pandemic level. But the important thing is that it’s constantly getting better.
Therefore, a wise investor should be careful about their choices now.
Is It a Good Idea to Invest in a Volatile Market?
A bear market is difficult for investors to navigate.
However, it’s not entirely bad as long as you go in with your eyes open. This means that you need to understand that you are taking a big risk. Also, you need to accept that you will suffer some losses.
Therefore, it’s best to spread your portfolio around multiple markets. Taking out a part of your investment funds for “safekeeping” can also be a good idea.
That said, removing your funds completely can be a huge mistake. The situation today causes many investors to panic. It’s understandable because you can see how your stocks are crashing. However, selling them off while the prices are down might not be the best solution.
Think of it this way, should you get rid of your portfolio in a slump, you will suffer major losses. There is no other way about it because prices are low and they will stay so for a while.
On the other hand, companies that are in a bad position now may still recover. Therefore, it will take a while, but your portfolio will be back to turning in some profit. All you need to do is wait.
Meanwhile, the bear market offers an opportunity to buy top-quality stocks for cheap. Therefore, you can use it as a chance to improve your portfolio to boost long-term returns. The problem here is making the right choices on what to invest in.
There are always tech giants like Microsoft and Apple, which should survive any crisis short of the rise of Skynet. However, no matter the recession, that stock won’t become cheap. So you need to try and find less obvious options, which is a challenge even for most experienced investors.
Pros Of Investing During a Recession
Opportunities to get good stocks while their prices tank.
Long-term potential for greater yields.
Investors focused on long-term gains are the ones that can benefit from bear markets greatly. As long as you are willing to accept some losses, you can buy now and wait out for your investments to pick up again.
This is a good time for dividend investors because of the opportunities. But you need to accept the fact that you won’t see good returns for a while. Therefore, you need to have other sources of income to support you throughout this period.
Or you need to diversify your portfolio investing in stocks and bonds that won’t be affected by the recession. Moreover, you need to invest in stocks that are growing in price in spite of the situation. For example, healthcare businesses are soaking up investments now.
Cons Of Investing During a Recession
Risk of losing some or all of your investment.
Limited options for investment.
The problem with investing during a recession is that despite the volatility, you don’t get as many options as you might want. First of all, unless you are a billionaire, your funds are likely limited. Therefore, you need to be very careful with how you use the money.
Also, you won’t be getting a good yield from your investments for a while. This means that you might have to pull out some of the funds to support yourself for a while. This limits your options further.
There is also the problem of bonds. They aren’t as affected by the crisis, which should make them a safe bet, right?
Unfortunately, the latest bond rally in Canada has pushed yields to record lows. This is directly related to the rapid collapse of global energy investment.
Therefore, while risks might be lower with corporate bonds and treasuries, small yields make it not worth investing into. This makes it more tempting for investors to pull out completely and simply wait for the global economy to recover.
What Are Safer Alternatives for Canadian Investors?
While stocks are volatile and bonds bring little to no yield, you can consider placing your investment cash into a savings account. This isn’t the most profitable choice because savings accounts in Canada have very low-interest rates. However, some options available now can beat whatever you can get from bonds by a large margin.
Moreover, keeping your money in a savings account is literally safer for you. This part of your funds won’t be affected by any market fluctuations. And you’ll be able to use it whenever you need the money. But that will only be possible if you choose the right kind of account.
Luckily, for Canadians making this choice is rather easy. There aren’t many banks that offer interest rates much higher than 1%. EQ bank stands out among all others because it not only offers a higher rate but also has very flexible terms.
As you can see from EQ bank’s review by Million Dollar Journey, you’ll always be able to use the money you put into the Savings Plus account as soon as you need it. This means you can take out any amount and the rest will sit there and keep on gaining 2% interest.
The majority of other banks do not allow withdrawing funds from a savings account. Therefore, in order to do this, you’ll have to transfer funds from your savings to a chequing account in the same bank. This requires time as well as cost you a hefty fee. Then, you can withdraw money from the chequing account, which means more fees.
EQ bank allows you to use your savings account in any way you wish any time, so there are no extra fees involved.
In the meantime, your investment money will be collecting 2% interest, which is one of the highest offers in Canada today.
Choosing To Invest During a Recession? Here’s What You Can Invest In
The most basic rule of thumb is that during recession stock prices fall while bonds rise. However, nothing in the investment business is ever simple and straightforward. The problem is that directional investing is extremely difficult, if not at all impossible, at this time. That’s because volatility is so high, there is no consistent market movement for you to track the direction of.
Some people use these opportunities to outright speculate on changing prices. However, this is extremely risky. Also, as the global economy is in a downturn altogether, there might be no chance for you to sell off the stocks or bonds you buy for profit.
One thing is for sure, a recession and market volatility that precedes it are signs you should rethink your investment strategy. Stock-wise now is the time to invest in specific types of companies:
Generally strong businesses with low debt. Research the company history to see how well-managed it is and, if applicable, how it fared through the recession of 2008.
Companies that are not cyclical. Cyclical businesses are a risk by default. However, in times of recession, they have little chance of pulling through at all. Considering the predictions that state this will be a long recession, the majority of cyclical businesses will not survive. Note that cyclical businesses from the hospitality and entertainment industries were hit the hardest by the pandemic. And they might suffer more as the second wave hits many countries.
Companies that are traditionally recession-proof.
No business is impervious to a global economic recession. But there are a few types of companies that usually experience only minimal losses. Those are businesses that sell necessities, discount retailers, and utility companies. Bear in mind that the coronavirus recession also pushed healthcare and tech companies to the front.
How To Reduce Your Risks When Investing During a Recession
It’s true that the risks of investing during a recession are big. However, there4 are ways to reduce them significantly. All you need to do is a little planning.
First of all, you need to set up a savings account if you don’t have any. A high yield option will help you make some money as if it were a bond investment. But most importantly, this emergency fund will give you a sense of security. This will remove a lot of stress so you can concentrate on making smart investment decisions.
Next, you’ll need to use some professional help. Hiring a personal investment broker might be too much for you.
However, you definitely can benefit from using discount brokerages. The most popular in Canada today is Questrade, which is growing rapidly. It has very friendly rates, which is a good reason to pick this particular broker today as you need to reduce your expenses.
Another important thing to do in order to retain and increase your fortune over time is to think long-term.
While markets are volatile and the economy is struggling, you need to forget about short-term deals and losses. Every time you consider an investment, think about how this business will hold up in ten years.
You also need to accept the fact that once you invest, this money will be “lost” to you for a while. You won’t be getting high returns on investment, quite possibly for a few years. Therefore, you need to plan your purchases and budget accordingly.
Finally, remember that high-risk deals are your enemy now, no matter how attractive they might seem.
What’s In The Future for Canadian Economy and Investors?
According to a Deloitte forecast, the Canadian economy and investors are in for a rough time. The contraction of the economy is unprecedented. And it’s not only the COVID-19 pandemic that is to blame for it.
Canada was hit far greater by the sudden and devastating plunge in oil prices. As it’s one of the country’s topmost exports, the drop from $60 to $15 per barrel created a problem that won’t be fixed.
It will take years for oil markets to recover. The energy sector will take even longer as it suffered significant losses. And it will continue to suffer as more investors are leaving it for safer options.
Historically, energy companies were one of the recession-proof stocks. However, in 2020, these businesses suffered enormously. Rapidly deteriorating business finances make it impossible for them to stay afloat, let alone rebuild to a pre-recession level. At the moment, the entire industry is shrouded in uncertainty.
Therefore, investors can be sure of one thing, only those with an exceedingly long-term vision should be buying energy stocks.
The good news is that the country is starting to recover post the pandemic. As local economies reopen after lockdowns, the situation should start improving.
However, this will be a slow and gradual process. Experts claim that Canada might only get back to the pre-pandemic level by 2022. But even that isn’t certain as the recovery of the global economy will affect Canada as well.
There is also the matter of increasing debt on all levels, both the government and people. The Bank of Canada is doing its best to increase liquidity and ward off inflation and depression. Unfortunately, those efforts, while commendable, aren’t enough to avoid the impact of the contraction.
How Can Investors Survive the Coronavirus Recession?
At the moment, the economic situation seems dire. This makes many investors panic and tries to sell off their stocks or to buy bonds that are rapidly becoming overpriced. Those are natural patterns of investor behaviour in times of crisis. However, following those patterns might bankrupt you fast in 2020.
Losing your portfolio is definitely not a good option. But you will need to restructure it. You might also need to pull some funds out of it in order to set up an emergency fund. This is best done with the help of high-yield savings accounts available from banks like EQ.
Other than that, you need to focus on diversification. Investments in bonds are safer now, but they offer very low yields. This won’t change anytime soon. Therefore, even as a long-term option, this shouldn’t be your only investment choice.
Investing in stocks, on the other hand, is risky. It’s also not profitable at the moment. The economy has contracted greatly and it will get worse by the end of the second quarter. Any recovery by the end of the year won’t reach the growth rates of 2019.
That said, a diverse stock portfolio, especially of high-yield dividends, is the best strategy today. It won’t bring you good returns for a while because businesses need to recover. But you can be sure that the situation will improve significantly in a few years.
Therefore, your main goal should be to plan your budget in a way to stay comfortable during these years. Then, your investments will provide well-deserved returns and your fortune might grow by a large margin. It will all depend on how well you choose what to include in your portfolio now.
Let me know your thoughts and comments below, do share this article on social media and help spread the word. Thanks for reading!
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.