The big story in personal finance is no longer interest rates – it’s recession risk.
The Bank of Canada passed on opportunities to raise rates in both September and October, a sign that borrowing costs are high enough now to contain inflation. The bank stayed on the sidelines in March and April, then resumed rate hikes. But the economy is too fragile today to withstand much more pressure from rising rates.
This fragility is where you should focus your attention in managing your investments and finances in the months ahead. Here are some thoughts for specific groups:
Retirees: Make sure you have enough secure, risk-free cash in your registered retirement income fund to cover two or three years’ worth of mandatory withdrawals. High-interest savings products and short-term guaranteed investment certificates let you park money safely and earn roughly 4.5 to 5 per cent. If stocks tank on concerns about a recession, dip into this money instead of selling hard-hit stocks or equity funds. The answer to sinking stocks is not to hope the federal government partly reduces the mandatory annual withdrawal amount, as it did in 2020 and 2008.
Gig workers: Now’s the time to build up an emergency fund to cover your expenses in case a contract isn’t renewed and it takes time to find more work. An economic slowdown will encourage employers to reduce head counts, and gig workers are the easiest to cut. That’s why gig work was invented.
Recent hires: Job One is to show your value in the workplace to lessen your vulnerability in case of job cuts. Prepare for LIFO rules – last in, first out. All that leverage you had in negotiating with your employer when you were hired many months ago? It’s fading.
Borrowers: If you’re falling ever further into debt, get help from a non-profit credit counselling agency rather than waiting until you blow your credit score to pieces with late payments or defaults. A recession complicates indebtedness by introducing the risk of reduced income through the loss of a job or hours worked.
Car buyers: Any way you look at it, now is a non-ideal time to buy a vehicle. Can you put it off for 12 months, when pent-up demand caused by the pandemic dies down? Between high interest rates and a demand-driven surge in prices, it’s a uniquely bad time to buy a car or truck.
GIC investors: Five-year GICs look better than ever if interest rates have peaked. As inflation edges closer to the 2-per-cent level preferred by the Bank of Canada, your returns will be locked in at today’s elevated levels. Your real rate of return, after inflation, will improve.
Investors: Bonds are so downtrodden that a third straight year of losses for bond funds is a real possibility. Stocks have held up comparatively well, but now they’re also in retreat. Planning to guess which will outperform in the next while if the economy falls into recession? Please spare your portfolio this grief and instead rebalance. Sell either stocks or bonds as needed to get back to your target portfolio mix. The default balanced portfolio of 60-per-cent stocks and 40-per-cent bonds should weather a recession well, given that falling rates would push bond prices higher. For the year to date, 60-40 balanced portfolios have hung in nicely.
Rookie homeowners: Prepare for price declines on your recently bought homes, potentially to the extent that you owe more than the current value of your property. Time will fix this problem. Just pay your mortgage and stay patient for the next real estate upturn. Also, think hard about paying down your mortgage rather than investing any spare cash. I’m usually much more open to investing than paying down a mortgage, but today’s mortgage rates are very comparable to what you can ideally get long-term from investing. The mortgage paydown is a guaranteed result, while investing’s ups and downs can take years to sort themselves into a nice average annual gain for you.
Savers: Familiarize yourself with deposit insurance protection now to prevent stress ahead. There is no particular reason to worry about the safety of your savings and GICs right now, but economic uncertainty could change that. I see it every downturn – inquiries from readers about whether they need to worry about their bank or credit union. Find out now how you’re protected by Canada Deposit Insurance Corp. or provincial credit union deposit insurance plans.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, October 25, 2023