Weekend Reading – Surviving a recession edition
Welcome to a new Weekend Reading post: surviving a recession edition.
You can check out other recent posts below:
This recent Weekend Reading edition offered up some ideas and thoughts about what my semi-retirement plans might look like – and some considersations about the current retirement landscape in Canada.
In more detail, this is my Financial Independence Update answering questions like:
How much money should I have to retire?
When should I take my government benefits?
How can I generate income from my retirement portfolio?
Weekend Reading – Surviving a recession edition
Are we headed for a recession?
It certainly looks and feels that way…in the U.S. and here in Canada.
Earlier this year, I read the odds of the U.S. falling into a recession were about 50/50. Triggering any U.S. recession was/then the combination of higher than normal gas prices, a Federal Reserve bent on controlling inflation (via higher interest rates), and slower economic growth.
But we have seen this drill before….
Source enclosed in graphic.
Here at home, with any pending recession coming, a recent poll highlighted a modest number of Canadians are expecting to suffer. A new poll has found that more than a quarter of Canadians feel they won’t be able to financially weather a recession – they will be gasping for financial air per se.
That’s not very good for sure…
A recession is typically defined by a contraction in economic growth (i.e., two consecutive quarters of falling GDP), lasting at least six months, as higher oil prices, higher inflation and higher borrowing rates take toll.
And…the signs this is happening are around us:
- Slowing economic growth.
- Industry layoffs.
I’ve previously shared on my site, there is certainly more than one way for a recession to start:
- A sudden economic shock: The coronavirus outbreak is a good, powerful example.
- Excessive debt: When individuals or businesses take on too much debt, the cost of servicing such debt grows. Growing debt can trigger defaults. Bubbles happen and need to pop.
- Asset bubbles: Irrational exuberance can inflate stock prices or asset classes. Corrections are necessary and required.
- Too much inflation: Inflation isn’t a bad thing but excessive inflation is bad. Inflation was out of control in the 1970s. History might repeat.
- Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. Japan struggled with deflation throughout most of the 1990s and well beyond.
Are there ways to survive a recession?
I think so, even if any recession is totally out of your personal finance control. Here is what I am doing and preparing for the best I can:
- Keeping cashflow as constant king. I see some financial experts quoting “cash is king” but while cash is good, managing your cashflow is much better. Ultimately, you should always be living below your means which means you’re running a financial surplus every month. That surplus should go into an emergency fund / cash surplus first and then into income producing investments (in my opinion) next. The combination of having cash savings stored when calamity strikes AND income producing assets for cashflow will be an enabler if you lose your job and/or are temporarily unemployed at least.
- Keeping my emergency fund intact – until I need it. Given you are running a surplus every month, cash savings stored away can be used as needed during a recession. If you need to find ways of running a surplus, then be ruthless with your budget and avoid unnecessary subscriptions, dining out, and any discretionary items you can cut back on. This might not be easy…
- Minding the debt. If you have a mortgage still, that’s probably plenty enough. I know it is for us. Work on paying it off. Consumer debt will be more costly in a recession when budgets get tighter. Where possible, as always, avoid lingering consumer / credit card debt and any major lines of credit. (We’ll be debt-free in another year or so here.)
- Finally, practicing diversification and keeping the investing course. Going all-in on a few stocks or stocks in just a few sectors (i.e., like tech as a growth sector) could be risky to your financial situation. See Algonquin Power of late – anything can happen to any one stock. Recessions come and go, eventually, so don’t let your emotions get the best of you near-term when your financial plan is designed for the long-term. You are welcome to look at (and comment on) some key stocks in my portfolio here.
Recessions, hardly fun for anyone, are normal and a period to get things back into economic balance. Our C.D. Howe Institute Business Cycle Council highlighted we’ve had five recessions since 1970.
These recessions usually last between three to nine months.
So, best plan for them, expect them from time to time, and learn to navigate them for that period of time as best you can.
More Weekend Reading…
I read about more backlash on the 4% rule of late – maybe rightly so?
It’s a good starting point as a rule but hardly a great rule for anyone – far from it. Poor Bengen.
“Jeet Dhillon, senior portfolio manager at TD Wealth Private Investment Counsel in Toronto, says she tries to steer clients away from some of the investing rules of thumb, like the 4-per-cent rule.
“Instead, we try to look at their personal situation because there’s a lot of factors that affect it,” she says.”
“A plan isn’t something you do once and forget about,” she says. “Good advisors will look at this plan and see how a client is tracking” from year-to-year.
Smart. I like it!
Better still, I like what Ian Calvert, certified financial planner, vice president and principal, wealth planning at HighView Financial Group in Oakville, Ont mentioned:
“Capital moves up and down … but accounts that have been structured correctly from the beginning have been able to maintain their withdrawal rates through this year,” he says. “It means having a portfolio where you’re not forced to sell equities in a negative market.”
“A good retirement planning strategy … comes back to yield. It could even be more than 4 per cent, depending on the asset allocation for the client,” he says.
Ben Carlson highlighted it might just take a recession to slow down the consumer.
“As long as the labor market remains strong, most households will be fine going to restaurants, taking a trip to Disney and filling up the airports.”
A pending recession isn’t slowing Chrissy and her family down one bit – it’s been one year of FIRE/early retirement for her. Amazing. Some interesting Q&A with Chrissy can be found here – so ask her anything!
My friends at 5i Research highlighted bubbles aren’t just for stock markets. (A reminder I have an amazing partnership with 5i on this page here so check out that deal should you seek some conflict-free professional research for your stocks or ETFs as a DIY investor!)
On the subject of DIY investing, Mike, aka The Dividend Guy Blog, interviews Bob from Tawcan in his new podcast. This podcast is about FIRE and dividend investing and is one of his most popular interviews yet.
Mike and Bob are always two of my favourite people to chat with about personal finance and investing. If you are curious about any dividend stocks that really rock – make sure you check out my great partnership with Mike at DSR for a whopping discount on his membership. Full details at the top of this page here.
Wondering about U.S. withholding tax on some low-cost ETFs? Justin Bender delivered the goods.
Buddy Tom Drake has some good ideas for your RRSP investments. I know I’m buying more stocks in a few weeks, Tom!
Have a great weekend!