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Stocks or bonds? Here’s where to park your money as recession fears ratchet up

Click to play video: 'Global News Morning Market and Business Report – October 4, 2022'
Global News Morning Market and Business Report – October 4, 2022
Canaccord Genuity Wealth Management's Rob Tetrault explains what 'buy the fear' means, and discusses a financial move made in Australia. – Oct 4, 2022

Editor’s note: A previous version of this story incorrectly started the number of respondents to Finder’s survey. This reference has been removed.

Almost a quarter of Canadian investors said in a recent survey that they’re thinking of cashing out their stock investments after a rough year for the markets and rumblings of a possible recession. But experts are cautioning against rash decision-making in the heart of a downturn.

Results from an online survey for price and rate comparison site Finder published last week show almost one in four Canadians (24 per cent) have no confidence in the stock market and are planning to “cash out” before the end of the year.

The remainder had varying levels of confidence in the stock market, but only nine per cent said they were “very confident” that their portfolio returns would meet or exceed their expectations for the year.

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Conditions in the stock market have not improved since the survey was conducted in July. The Toronto Stock Exchange (TSX) hit a new low for 2022 last week, with sectors such as tech taking heavy losses this year.

Read more: S&P/TSX composite hits new low for year, U.S. markets mixed in volatile trading

Wall Street officially entered a “bear market” in June after dropping 20 per cent from recent highs at the start of the year, marking the barometer for a prolonged downturn on the stock market.

Romana King, senior finance editor at Finder, tells Global News that the emotional urge to act and take control of your investments by cashing out or jumping onto a hot new position should be treated with restraint.

“If you have an impulse to do something, I think that’s the moment you need to stop and take stock, quite literally — take stock of your stock,” she says.

When investors see their portfolios taking a hit in a bear market, it can be tempting to “cash out” and avoid further losses, King says. But doing so only “crystalizes” losses to date, she notes, and can come at the expense of gains when the market cycles back towards growth.

Jason Heath, managing director of Objective Financial Partners, says it’s been a “brutal year” on the markets and seeing losses in your portfolio isn’t necessarily a reflection of a losing investment strategy.

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“Stocks are down. Bonds are down. Cryptocurrency, real estate. I mean, pick your poison. Everyone’s lost money this year, unfortunately,” he says.

“But that’s part of investing.”

Canadians with a long-term investment horizon — the stock market is best suited for these investors, according to Heath — should not look at 2022 in isolation and determine their strategy is a failure, he argues.

Rather, investors who are upset by the sudden drops in value might want to use this period to assess whether their risk tolerance was right to begin with.

“I would discourage them from making a wholesale move, like selling everything and going to cash. But it may be a reason to assess how much exposure you have to stocks going forward,” he says of panicking investors.

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Opportunities in a recession

RBC and Deloitte are among the forecasters predicting that a mild recession will hit Canada in 2023. But that should also not provoke a change in savings strategy, both King and Heath say, and could even open up some new investment opportunities.

Heath says there’s a key difference to remember between the economy and the stock market: while economic data typically comes in on a lag, stocks are priced with future performance in mind.

“By the time you read in the newspaper or you hear on the news that there’s a recession, it’s already six months after the recession has started and stocks are looking six months down the road,” he says.

Read more: Deloitte forecasts short-lived recession in 2023, but says job losses shouldn’t be severe

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While Heath cautions most casual investors from trying to time the market — a feat he notes is rarely accomplished even by professionals — a downturn can be a good time to get stocks that have solid fundamentals “on sale.”

“If you’re investing for the long term, now is a great time to take advantage of the downturn in the market,” he says.

Other products geared towards more conservative investors such as bonds are starting to see better yields, and guaranteed investment certificates (GICs) are advertising higher returns as the Bank of Canada’s interest rates rise, Heath notes.

King agrees that now is an “excellent time to invest” in well-capitalized companies with strong fundamentals like a steady cash flow.

She says a possible recession doesn’t mean there’s no growth happening anywhere in the economy. “Staples” such as groceries, pharmaceuticals and utilities can perform well in recessions because they are in high demand even when discretionary spending scales back, she says.

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Avoid cutting back on savings

With an economic downturn threatening jobs and still-high inflation eating away at disposable income, King acknowledges it can be tempting to trim down on savings and investments during the lean times.

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But if you can find extra cash to stay on track with your savings and investment strategies, squirrelling away money is always going to pay off, she argues, as giving up on the long-term benefits of compounding interest to make a one-time payment can be damaging to your overall financial wellness.

Read more: The loonie is at a nearly 2-year low. What does that mean for inflation?

Instead, King offers that monthly subscriptions and other nice-to-haves should take the hit before investment contributions. She says revisiting recurring costs such as phone and internet plans or insurance premiums are good places to start to see where you can trim or negotiate lower costs.

“It’s very easy to cut back on the non-tangibles, the things that I don’t need for 10, 20 years, like investment in savings for retirement,” King says.

“Instead of looking at your investment strategy and your savings and where to cut on those, first, look at your spending. Try to spend less rather than save less.”

In dire situations like a lost job, however, some Canadians may need to dip into their savings or investments. But Heath says if you are going to sell, don’t cash out completely, as you’ll miss out on the upside whenever the market bounces back.

“If 95 per cent of your money is still invested at the end of the year and you’ve only pulled out a little bit, you will benefit from the recovery — not if it happens, when it happens,” he says.

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