As the year wraps up, many of us go through our annual checklist of time-sensitive things to do. Although timing the market is something we do not promote, we do believe that the market is cyclical. One should always be prepared for a recession, especially when many reliable indicators are suggesting that we are heading into one in the near future.
From our years of experience, we have noticed that economists, even ones backed by major banks, do not always predict a recession correctly. Let’s take 2019 as an example. If you have participated in the market in the past 12 months, you would have had a double digit return on your portfolio. However, we know that some have missed the boat because they cashed out in the beginning of 2019 after a major correction at the end of 2018.
Hence, we never encourage our clients to time the market. Instead, we emphasize on being proactive and to prepare for both the best and worst case scenarios. Here are a few suggestions to consider:
1. Money that is saved for short-term (3 years or less) should be in a guaranteed savings account. Do not take any chances as you really want to avoid any withdrawals at the bottom of the market.
2. Re-assess your current asset allocation on all accounts to see if you are using the right mix (eg: conservative, balanced or growth). Most importantly, go through the mental exercise yourself or with your advisor on what may happen to your portfolio in a major market downturn.
3. Lastly, set up automatic savings plans so you keep investing month to month. Dollar cost averaging is the most resilient strategy that works in any market cycle. You want to invest with discipline and invest just as much and as often when you enter the recession and when you come out of it.
These suggestions may seem generic but you will be surprised how many would become emotional and not follow them when the recession does hit. Lastly, the cost of investment should always be part of the consideration. In this day and age, we see little to no benefits to invest in any expensive, actively managed mutual funds.
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