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3 Ways to Prepare for an Economic Downturn

person holding with cellphone investing during a recession

An Investor’s Guide to Surviving Market Volatility

For a younger generation of investors, the past dozen years have been a mostly stress-free experience. After the Great Recession of 2008-09, North American stock markets experienced an unprecedented 11-year bull market—with stock prices rising 400 percent[1] between 2009 and 2020. Then, after a brief (but deep) correction in the first months of the pandemic, things continued to climb higher.

Those who haven’t experienced a bear market—where stock market indices drop by 20 percent from recent highs—might feel a sense of panic when downturns happen. But the reality is that bear markets occur with some frequency—by one estimate, you’ll experience 14 of them[2] in your lifetime—and the good news is that they tend to be shorter: on average, about 289 days[3], or just under 10 months.

This year, there are several culprits for market volatility—including uncertainty around the pace of interest rate increases, rising inflation, energy-market instability, and continuing supply-chain issues coming out of COVID. Each of the cyclise factors affects companies in different ways, but generally speaking, they eat away at corporate profitability—putting pressure on stock prices. And over time, these economic pressures (especially rising interest rates, used to fight inflation) increase the risk of a recession.

So what should an investor do in these turbulent times?

1. Focus on Long-Term Investment Horizons

Sue-May Talbot, a Portfolio Manager and Partner at Genus Capital Management, has seen her fair share of ups and downs. Talbot was Genus’ first hire back in 1989; she’s worked through the fall of the Berlin Wall, the handover of Hong Kong and the Great Recession of 2008-09. Every external event—political, economic or financial—has an impact on portfolios. But Talbot’s advice remains the same: focus on the long-term goal, and don’t get distracted by the day-to-day noise.

“The stock market is one of the best performing asset classes over time[4],” says Talbot. “There are going to be temporary fluctuations, whether it’s COVID, a war, a tsunami; there’s always going to be something that’s going to cause the markets to go down. But it’s cyclical.”

Talbot argues that investors need to have a clear understanding of their time horizon—and build their plans accordingly. While some investors need shorter-term goals—a horizon of two years, for instance, because they’re saving for a home down payment—most can wait for the markets to recover, she adds.

2. Be Clear on Your Values and Risk Tolerance

Talbot says that one of the first conversations she has with clients, in creating an investment plan[5], is values and risk alignment. “We need to create a long-term plan to ensure that the portfolio will be able to ride out the volatility in the markets,” she says. “We say to our clients: ‘It’s not always going to be a straight upward line—but the trend is still upward.’”

Every client has a different tolerance for risk—and Talbot says it’s not just financial risk but emotional risk[6] that needs to be considered. “Financial risk means you have the financial ability to wait for the markets to recover,” she says. “But emotional risk—if clients are losing sleep at night, if they’re sick to their stomach when they wake up because markets are down 2% or 3%? Well, maybe we need to make some changes.”  It’s easy to say you have a high risk tolerance when markets are seeing all-time highs, but the reality is your risk tolerance will be tested during a downturn, and the way you behave at that time is probably a better indicator of your real tolerance.

Investors should also know that avoiding investments in certain industries and sectors (such as fossil fuels) may also affect the performance of their portfolios – whether positively or negatively. As an example, during the height of the pandemic, the price of oil dropped significantly due to low demand, so if you had oil and gas stocks in your portfolio, that would have hurt performance. Now the reverse is true: the price of oil has recently risen due to high demand and low supply. These are temporary fluctuations, and reinforce the importance of a long-term approach to investing.

3. Diversify Your Holdings to Reduce Risk

The expression “don’t put all your eggs in one basket” is especially relevant in 2022. And with all the volatility, it’s practically impossible to avoid a few cracked eggs. But Talbot says you can limit the damage by diversifying asset classes (stocks, bonds, cash), diversifying geographic exposure (North America, Europe, Asia) and diversifying sectoral exposure (financial, technology, consumer goods). You should ideally have exposure to a variety of asset classes that move at different times and speeds. 

Now, more than ever, is the time to be investing in stability. “Right now we’re looking at what we call the ‘value’ names: companies that do okay even if the economy isn’t doing well,” says Talbot. “We look at companies that have solid balance sheets and are paying a consistent dividend.” This is particularly important for investors who have immediate income needs, she notes.

Ultimately, in a turbulent market, there is no “secret sauce” to investing and remaining unscathed, says Talbot. The only certainty is that “this too shall pass.” “If you look at charts throughout history, which show all the bear markets—the markets always recover,” says Talbot. “If you maintain a long-term time horizon, we expect you’ll be okay.”

 

Interested in exploring how to build your financial legacy? Talk to a Genus Advisor today.

[1] Tretina, K. & Curry, B. (2022, May 6). Bear Market and bull market: What’s the difference? Forbes. Retrieved July 5, 2022, from www.forbes.com/advisor/investing/bear-market-vs-bull-market/#:~:text=The%20average%20bull%20market%20lasts,growth%20of%20more%20than%20400%25.

[2] Tretina, K. & & Curry, B. (2022, May 6). Bear Market and bull market: What’s the difference? Forbes. Retrieved July 5, 2022, from www.forbes.com/advisor/investing/bear-market-vs-bull-market/#:~:text=The%20average%20bull%20market%20lasts,growth%20of%20more%20than%20400%25.

[3] Tretina, K. & & Curry, B. (2022, May 6). Bear Market and bull market: What’s the difference? Forbes. Retrieved July 5, 2022, from www.forbes.com/advisor/investing/bear-market-vs-bull-market/#:~:text=The%20average%20bull%20market%20lasts,growth%20of%20more%20than%20400%25.

[4] Team, T. I. (2022, June 13). Which investments have the highest historical returns? Investopedia. Retrieved July 5, 2022, from https://www.investopedia.com/ask/answers/032415/which-investments-have-highest-historical-returns.asp

[5] How to create your personal investment philosophy. Genus. (2021, June 28). Retrieved July 5, 2022, from https://genuscap.com/how-to-create-your-personal-investment-philosophy/

[6] How to cope with emotional investing and market volatility. Genus. (2021, August 24). Retrieved July 5, 2022, from https://genuscap.com/how-to-cope-with-emotional-investing-and-market-volatility/

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