Today's economy

Six ways to manage an economic downturn

By Kevin Press,

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Image of a couple assessing their finances.If you share the view that Canada’s economy is headed for a rough patch, you’re in good company. A new piece of research my team produced for Sun Life Global Investments found that 64% of Canadian financial advisors believe the domestic economy will achieve just 1% or 2% gross domestic product growth in the year ahead. Full results of the Sun Life Advisor Sentiment Index will be out tomorrow morning.

Three in 10 advisors (31%) believe the economy will achieve just 1% growth. About the same number (33%) says 2%. Both those results would compare unfavourably to the 3.2% growth seen in 2010 and the average 2.4% growth rate Canadians have enjoyed over the last two decades.

If they’re right, it could mean a number of things to you and your family: less employment security, perhaps even unemployment; a smaller – or perhaps even no – salary increase; lower home values; and continued low interest rates (which is a plus for borrowers but a bitter pill to swallow for savers).

Here are six simple things you can do to prepare for the volatility that may be ahead:

  • Pay down your debt. This isn’t exactly a new idea, but it bears mentioning here. Pay off whatever debt has the highest interest rate attached to it first. Because the overnight rate is so low right now (1%), you’re in a position to pay off a larger chunk of your principal. Do as much as you can.
  • If your debt is in control, build an emergency fund. How much you save is up to you. Think about the risks you and your family face, and save accordingly. Is your car getting on in years? Save for a couple of trips to the mechanic. Is job loss a possibility? You might want to build a bigger nest egg gradually, perhaps the equivalent of six or 12 months of salary. Don’t overthink it. There is no magic number. Any size emergency fund is better than nothing. The question is how much of your savings do you want to be immediately accessible to you. Talk to your financial advisor about a tax-free savings account, a high-interest savings account or other options that will earn you interest on your emergency fund.
  • Speaking of which, talk to a financial advisor. Perhaps you ought to focus more on saving for your child’s education. Or maybe you’re in a position where debt repayment or emergency savings are higher priorities than retirement savings. In today’s low interest rate environment, it’s important to get professional advice about saving plans and investment strategies.
  • And hire a chartered accountant while you’re at it. My wife and I stopped doing our own taxes right after we were married. I can’t believe we didn’t do it sooner. CAs provide a ton of value.
  • Rebalance your portfolio. I’ve written about this before. Here’s why rebalancing is so important in a volatile market: “Say you have a $100,000 portfolio invested in three asset classes. Based on your policy statement, you decide to go 10% in asset class A ($10,000), 40% in asset class B ($40,000) and 50% in asset class C ($50,000). After a period in which asset class B outperforms, the value of your investments rises to $10,500, $50,000 and $52,000 respectively. Without your having made any investment decisions, your percentage allocations have changed from 10%/40%/50% to 9.3%/44.4%/46.2%. Let too much time pass and your portfolio can become seriously unbalanced.”
  • Spend less. Again, not rocket science but it belongs on this list. Have a fresh look at all of your repeating expenses: the cable bill, the phone bill, all those small monthly payments that add up over the course of the year. And think carefully about your spending. This might not be a bad time to put your annual winter vacation on hold for a year or two. These things are sometimes hard to talk about in a family. Be the one who starts the conversation.

Brighter Life will have more detail on the Advisor Sentiment Index June 26. Interestingly, advisors are generally more optimistic about capital markets than they are about the Canadian economy in the short term. Stay tuned.

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