Weekend Reading – Surviving a recession edition

Weekend Reading – Surviving a recession edition

Welcome to an updated Weekend Reading post: surviving a recession edition.

You can check out other recent posts below:

I shared a list of Top 100 Dividend Stocks to consider owning in this post below:

Weekend Reading – Top 100 Dividend Stocks

And, thanks to a reader question and request, I provided this post for some consideration:

Reader:

“Please accept my request or send me any articles on your site that address investing for someone older, with limited funds like myself for the TFSA.”

How to invest for retirement when time is no longer your friend

Weekend Reading – Surviving a recession edition

Are we headed for a recession?

Image Source: Pexels.

Could be. The Bank of Canada is trying to avoid that with some jumbo rate cuts coming.

In a recent article I read, Canadian Imperial Bank of Commerce says policymakers led by Governor Tiff Macklem will reduce the interest policy rate by 50 basis points at each upcoming meeting in December and January, according to new forecasts for 2025. 

Eventually, CIBC predicts our central bank to end the easing cycle next June 2025, arriving at a policy rate of 2.25%.

For those keeping score from where we are, that’s a very swift round of cuts and with unemployment rates spiking, there’s really no reason not to speed up the rate cut process…

You might recall our Bank of Canada started reducing the benchmark overnight rate this June, and has since lowered it by 25 basis points at its July and September meetings, bringing the rate to 4.25% from 5% at the peak of the hiking cycle.

Another lender, National Bank of Canada, more near-term anticipates a 50 basis point cut before the end of 2024. That means we should be down to at least 3.75% by the holidays.

When rates fall, some of the immediate impacts seen equate to bond pricing = bond prices head higher as interest rates drop and vice versa. Other impacts occur too. Guaranteed Investment Certificate (GIC) rates (that typically allow customers to lock in their cash for a set return over a period of six months, a year, two years or more) fall in interest value. And, not surprisingly, Higher Interest Savings Accounts (HISAs) fall in correlation with the central bank’s policy rate.

On the plus-side, when money flows out of more secure investments – where could it go??

Back into some equities. 🙂

While the stock market has less of a direct correlation with the Bank of Canada’s interest rate cycle it can be good/beneficial for stocks in general because rates coming down signals an effort to stimulate growth in the economy – and the stock market is a forward looking indicator for growth.

Anyone paying attention of late, as a faithful owner of utility stocks as an example, has seen a sudden rise in those stock returns of late. Companies like Fortis (FTS) and Capital Power (CPX) among others are flying.

Thanks to lower interest rates the party in that sector may just be starting – utilities enjoy and can thrive in a lower interest rate environment.

(Disclosure: I own all those utility stocks listed and more at the time of this post.)

How long could you weather a recession?

In a previous article on my site, a poll highlighted a modest number of Canadians would expect to suffer in a recession. More than a quarter of Canadians feel they wouldn’t be able to financially weather a recession…

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. And…the signs this could be happening are the following:

• Slowing economic growth.
• Industry layoffs/higher unemployment. 

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 was a good but sad, 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 as an example. It wasn’t much fun recently either! 
• 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?

For sure.

Here is what I’ve thought about over the years and how I continue to manage our portfolio for any recession period:

1. Keep cashflow as king. I see some financial experts quoting “cash is king” but while cash is good, managing your cashflow is much better. I prefer cashflow as king.

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. We’ve managed our portfolio this way for years. We keep a modest and growing cash wedge and we have rising dividends and distributions rolling in every month for future spending.

August 2024 Dividend Income Update

This combination is a HUGE enabler for us and could be for you too – if something happens to your job and/or you are temporarily unemployed at least.

The Cash Wedge – Managing Market Volatility

2. Keeping my emergency fund intact – until I need it. Given you are running a surplus every month, cash savings stored away (even at lower rates) can be used as needed for spending 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…but required. 

3. Mind your debt. If you have a mortgage still, that’s probably enough. 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 have no debt at all which remains financially liberating.)

4. Finally, practice diversification and keep the investing course. Going all-in on a few stocks or stocks in just a few sectors could be risky to your financial situation. See Algonquin Power (AQN) of late in recent years – 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. 

Whether you own individual stocks or a global fund of stocks – ensure your portfolio is diverisfied across many industry sectors and any cash-related needs. 

How long do recessions last?

Well, recessions, hardly fun for anyone, are normal and a period to get things back into economic balance.

In referencing our C.D. Howe Institute, 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, expect them to last up to nine months, and learn to navigate them in the years ahead. 

More Weekend Reading…

This recession-talk reminded me what Dividend Growth Investor wrote about generational wealth.

“Anyway, let’s imagine a family which:

1. Invested $10,000 in S&P 500 at the end of 1927
2. Turned the DRIP on
3. Let the investment alone until today

They would have a portfolio worth $74,200,000 today.”

Incredible…see rule #4 above = practice diversification and keep the investing course. 

As a young multi-millionnaire here is DGI’s risk management plan and one to follow IMO:

“My risk management process is very simple:

1. I limit how much I invest in each position

2. I diversify

3. I focus on Established Dividend Growth Companies

4. I let winners run, and rarely sell

5. I maintain conservative personal finances and a high savings rate.

@DividendGrowth Source: https://x.com/DividendGrowth/status/1834922840522416627

On Financial Independence Hub, it is reasonable to have irrationally high portfolio return expectations?

Well, when I consider future returns, I’m somewhat aligned to the 2024 Projection Assumption Guidelines for professional financial planners across Canada. These new guidelines came into effect April 30, 2024. 

Designed to look beyond the current day rate environment, these Guidelines are intended to be used when making long-term projections of 10 years or more.

I use at the very top-end 6% returns for near 100% equity portfolios, including my own from time-to-time.

More conservatively we use 5% annualized returns for my own financial independence projections along with 3% sustained inflation for 2% real return since I believe those values are both realistic and sustainable when it comes to our plan. Your mileage may vary. 

Financial Independence Update

You can download the Guidelines for free here – a good annual resource. 

Bob from Tawcan is on his way to semi-retirement soon – and so am I. Bob was very kind to interview yours truly in this recent post. I welcome your thoughts and comments about what we discussed!

Dividend Growth Investor Q&A series – My Own Advisor

Source: https://x.com/NewcomerInvest/status/1833618662122787208

He has every reason to be bullish. Brookfield has a growth plan and as a $BN shareholder I will be happy to go along for the ride. 🙂

With thanks to @BarrySchwartzBW

Source: https://x.com/BarrySchwartzBW/status/1833652107053875707/photo/1

Finally, over at Cashflows & Portfolios, we wondered:

“…can retirement occur at all despite not investing in your TFSAs at all until age 45?”

Well, read our post to find out. 

How Much Do I Need to Save to Retire by 60?

Have a great weekend!

Mark