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How to diversify your portfolio for an unstable economy

By Jacqueline Ozdemir, MBA, CFA, Financial Advisor

Ferguson Financial Planning

Assante Capital Management Ltd.


Market Resilience and Setbacks

Before 2022, one of the most challenging years in the financial markets was the global financial crisis in 2008.


It’s been 15 years since then, a distant memory for some investors and for others, a time they were too young to recall.


Since that time, the markets have generally been on the rise with a few exceptions. Most investors made money if they had invested in the US stock market at the beginning of 2008 and held onto those positions until 2020.


Then came 2020 and we witnessed a brief stock market dip before governments and central banks intervened to prevent a global economic collapse. They injected money into the economy and lowered interest rates, despite being in a low interest rate environment.


During this time, while some people lost their job, overall household savings skyrocketed, as we were so limited on how we could spend money due to so many closures. There was a surge in retail investors and meme stocks became a thing, with some people making thousands of dollars on stocks like Game Stop.


When the province opened up again and people could freely go back to their usual activities, there was so much pent-up demand for services and goods. However, with many people in the service sector having been laid off and massive supply chain backlogs (stemmed from COVID-19), the supply could not

keep up with the demand.


Couple that with low interest rates, that made it “easy” for people to borrow money – the price of goods and services started to climb. Then inflation started to get out of control and we were all paying a lot more for our groceries and coffees than we were the year before.

We all know that in 2022, we saw large interest rate hikes and market declines that left us wondering: “Maybe it won’t always be good times in the stock market. Maybe interest rates won’t always be positioned to encourage growth in the economy, but rather halt growth.”


A Period of Higher Interest Rates

In the past year, economic analysts and professionals have been predicting a recession. At the time of this writing, it is possible that we are already in a recession.


So, you may be asking yourself:

  • Does it make sense to still invest?

  • How do we invest in a period of time that might not be completely favorable.


When thinking about investing during a recession there are a few things to keep in mind.


1. The stock market and the economic cycle aren’t necessarily the same thing.

The stock market is where we can buy and sell stocks of different companies. So, when we refer to the performance of the stock market, we are referring to how well these stocks or companies are performing.


The economic cycle looks at things like unemployment rates and GDP growth (ex. how much more a country produces year over year.) In a recession, we would expect unemployment to be high and GDP growth to be low. This is sometimes triggered by high interest rates like we are witnessing at the moment.


2. The stock market tends to be more forward looking.

We ask questions such as:

  • What do we think is going to happen in the future?

  • How will this impact a company’s ability to make money in the future?


Whatever the outcome of that is can impact the current price of a stock and the state of the stock market.


3. On the other hand, the economic cycle is a more backwards looking.

For instance, we only know if we are in a recession once the economic data for the previous quarter comes out. Therefore, it’s possible to be in a recession, but for the stock market to begin picking up.


This is a generalization and with anything, there are points in history we could point out where this wasn’t exactly the case.


Regardless, there are a few best practices that we could plan to follow:

Table

The guidelines listed above are best for longer term investment strategies - over 5 years. However, not everyone has a 5-year time horizon.


Time Horizon Factors

Other things to consider are:


1. When do you need the money?

The more time we have, the less variability we would expect to see in the long run. As we can see below, variability in returns decreases over longer time horizons.

Chart displaying the S&P 500

2. Are you already invested?

If you are already invested and have seen a decline in your portfolio and are concerned, I would encourage you to think about question 1 again. Do you need the money anytime soon?


3. What is your vulnerability to risk vs. your risk tolerance?

If your investments were to decline even 5%, would this have a massive impact on the goals you were saving for? What is your risk tolerance?


Even if you had more than enough money to meet your investing goals, how would you feel if your portfolio went down 5%? Are you ok with it or does it keep you up at night?


Overall, a shorter time horizon (less than 5 years) or a small ability to tolerate risk in a portfolio could warrant a different type of investment strategy – one that is focused on fixed income solutions.


Investment Strategies

For longer time horizons (beyond 5 years) we can consider using the best practices that were listed above.


Additionally, understanding your time horizon, assessing the urgency of needing funds, and aligning your risk tolerance with investment goals are vital factors in shaping an appropriate strategy. In an unstable economy, diversifying your portfolio is crucial to navigate the uncertainties.


For shorter time horizons, other investment strategies could be considered such as bonds, GICs or high interest savings. Economic cycles could last a few years and this will help protect from losing money for your shorter-term goals.


Crafting Your Investment Path

In conclusion, everyone’s investment style, risk tolerance and time horizon are different. No one has a crystal ball to know what is going to happen in the future, but based on past trends we can see how the stock market may react to where we are in the economic cycle. As such, some investments may do better whether we are entering or coming out of a recession.


Before investing in the stock market, I recommend considering your unique investment preferences, risk tolerance and time horizon to build out a portfolio that will help you reach your goals and that you feel good about. This can be done independently, but to really implement this, you’re going to need a trusted advisor.


 

Picture of the author

Jacqueline Ozdemir is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at (905) 272-2750 or visit www.fergusonfinancialplanning.com to discuss your particular circumstances

prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian

Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.







 

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