How to Invest in Volatile and Recessionary Markets

*Posted in 2009*

So you’ve lost 50% of your portfolio and wondering what to do and how you could have avoided the pain. Most are hearing sit tight, which is true, or heck, even buy, which is even more true. But is there anything you could or can do in a market that is in turmoil. Here are some suggestions to manage your portfolio in light of market volatility.

Firstly, there is a component of reducing debt loads and adjusting lifestyles. Those two go hand in hand. You lose your job? Tightening the purse strings? Chances are that requires a change in lifestyle that sees disposable income diminish. Maintaining this lifestyle will help you increase your savings/income for investments.

But what about your asset mix? Well, you can attempt to reduce risk. Reducing market exposure to less risky or guaranteed instruments is one method. However, it is unnecessary to move your entire portfolio to cash. Remember, you also don’t want to pull your money our that’s lost 50% give or take, and put it into 2% returning instruments.

If you’re closer to retirement, then as a general rule you want to begin reducing risk by heading to safer instruments (cash compared to equities). Canada has now implemented a new tax-free savings account that permits 5000 investment tax free per year. It can go a long way to increase your networth. You can also withdraw without losing your contributing room. However, the TFSA is not a long term instrument as the returns are at savings account interest rates.

The younger you are the more risk you can handle, the less balance your require since you don’t need the investment right away. If you’re approaching retirement, within ten years, you can start benefiting from balance. Also include strong bonds as part of your strategy.

The good news about all of your losses is capital losses. With non-registered accounts you can save on your taxes. If you end up selling equities at a loss those losses may be applied to offset your capital gains. Capital gains and losses can be carried forward to subsequent years as well.

Dollar cost averaging plays now as well. As noted, now is the time to buy. If you have the cash, then definitely consider putting in and maximizing your RRSP this year to buy equities at rock bottom prices. You may also be able to swap investments. Check out your portfolio and you may find that blue chip companies are going for prices around what you currently have.

So these were some aspects to consider when thinking about the right solution to deal with this current market climate.

1 thought on “How to Invest in Volatile and Recessionary Markets

  1. Bukenyaandy

    The statistics seem to be indicating an improvement and bright future for the economies but a lot of work need to be done to quench the thirst of many occupy wall street movement

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