As the stock market slides and the odds of a recession rise, something feels oddly familiar. I feel it most as I survey the sea of red in our retirement accounts.
Many comparisons are being made of the current market turmoil with that of 2020, but to me this feels more like 2008. The movements in the Dow of more than 1,000 points on consecutive days, the insane volatility, the breathless warnings about impending economic collapse. Yup, this definitely has a 2008 feel to it.
As someone who was starting my investing journey right as the Great Financial Crisis hit, I thought it might be useful to pass along the lessons I learned from it.
Avoid debt, negotiate rent
In every recession, the households that hold the most debt are the first to go bankrupt. 2008 was particularly brutal to people who had large mortgages, especially if they came from subprime lenders that sold mortgages with artificially low teaser rates. As job losses mounted, homeowners couldn’t afford their ballooning mortgage payments and some lost everything.
Today, many Canadians are in similar situations, having loaded up on cheap mortgages during the pandemic. As those mortgages come up for renewal, they’re facing higher rates and payments, combined with a rapidly weakening job market, owing to the trade war.
These homeowners are at the greatest risk of bankruptcy if the primary breadwinner loses their job. Don’t be like these people. Now is not the time to buy a house.
On the other hand, the opposite seems to be true for the rental market. Recessions can have the effect of lowering rents, and we’re already seeing rental prices cooling in Canada’s major markets.
If you’re a renter, look for opportunities to move to a new place to lower your costs, or use the threat of moving to negotiate with your landlord when your lease renews.
Spread your bets
The past few years of U.S. stock market overperformance has led many investors to increase the concentration of U.S. stock holdings in their portfolios. But in a year where the White House’s actions are crashing their stock market, this overconcentration will hurt you.
Spreading your bets by diversifying into international markets will buffer you from the volatility caused by events south of the border. Even though other countries’ stock markets will still be affected by the trade war, they’re only fighting with America, while America is fighting with everyone.
As of the start of this week, the U.S. market is the worst-performing developed country index year-to-date, down 13.1 per cent. The TSX has fallen 2.3 per cent, so it’s outperforming the U.S. by 10.8 percentage points, and the EAFE index – comprising Europe, Australia and Far East stock markets – has risen 6.7 per cent, which beats the U.S. by 19.8 percentage points.
Cash is king
Emergency funds seem boring in normal times, but in a recession having easily accessible cash is key. If you lose your job, your first line of financial defence will be the severance you can negotiate from your employer. The second will be EI.
After that, your emergency fund will determine how long you have to find a new job before you will be forced to start making some truly painful decisions.
To determine how much cash you need, add up your monthly spending, remove any luxury items that you could eliminate, such as vacations or gifts, and multiply that number by 12. That represents a year of base expenses. Keep that cash in a high-interest savings account from a zero-fee bank like Tangerine or Simplii Financial.
Keep investing as markets tank
After your rent is reduced, and you have enough cash in your emergency fund, and if you’re fortunate enough to remain employed, keep investing even as markets plummet.
This was the hardest thing to do in 2008, when markets were dropping. I distinctly remember taking $1,000 from my paycheque and putting it into the stock market, only to have markets tank further the next day.
It felt like I was lighting my money on fire, but what I was doing was picking up stocks at a discount.
That’s because recessions eventually end, and markets always recover in the long term. By buying more units at fire-sale rates, you will position yourself to participate in the recovery stronger than the collapse.
That’s what happened in 2008. Stock markets didn’t officially return to their precollapse level until 2013, but because I kept buying as stocks were falling and reinvesting the dividends, I got all my money back by 2010.
Recessions suck, but they aren’t uncommon. And while we can’t control when they happen or how long they last, we can control how we respond to them.
Bryce Leung retired in his 30s. He and Kristy Shen are authors of the bestselling book Quit Like a Millionaire.
