Don't let a good Recession go to waste

Geoff Cook - CFP, CHAIP

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Although we may not be in the perfect definition of a recession, we can rightfully say we are in recessionary times. Unemployment is still high, interest rates are still low and economic growth has stalled.

When it comes to financial decisions, most people do the opposite of what they are supposed to do.

For example - you know the old catch phrase "buy low sell high", well unfortunetly most people "buy high and sell low". Investors in general run on fear and greed. They wait for markets to be comfortably on their way up before they buy, and once its ready to take profits off the table they stay greedy, wanting higher returns. When the markets turn over to correct themselves, they jump out at a loss because they fear they will lose all their money. They then repeat these steps until broke...

                                                                                

Todays uncertain times present a great opportunity to build and grow wealth for two reasons.

Why today is great for you financially


1) Interest rates are low - When interest rates are low it means you will have lower debt payments. Use this extra cash flow to pay down your debts, and become debt free sooner.

The wrong thing to do is say to yourself "interest rates are low, this means I can have debt and it wont cost me so much"  and using this as an excuse to take on more debt. When interest rates rise again you will be kicking yourself.

For example - If I have a $20,000 line of credit paying prime (+) 3% and lets say prime is at 3% today.

This means I will be paying $1200 an interest a year.

If prime goes back to more "normal levels" of around 5% my cost suddenly increases to $1600 a year. (a $400 or shocking 33% difference in cost)

That $400 dollars is cash flow gone that you can do nothing about. There has been no more value added to the product or anything, its just gone. An added cost for nothing.

If I had of put the $400 down on my line of credit, I would have...

1. Lowered my interest cost moving forward, thus freeing up more cash flow to pay it down.
2. Lowered the outstanding balance of my line of credit.

The scary thing is that banks have full discretion to change your interest rate whenever they want. If your line of credit is unsecured it can be especially scary.


2) Equity investments are cheap - Recessionary times present ideal prices to accumulate assets. Stock and real estate prices often come down in price during uncertain times. This presents a great opportunity to accumulate equity and assets at basement prices. 

For example in 2008 when there was a large correction and markets fell. If you used that opportunity to dive right in to buying assets. You could have bought property in the US for next to nothing, and you could have virtually bought any quality stocks and doubled, tripled, or quadrupled your money.

Disclaimer - I am not saying you can just go out and buy anything. You need to still have dilligence in assesing what you are buying and assure you are buying quality...But you get my point.

What most people will do is sit on the sidelines scared, wait until markets rebound, then jump in and miss all the party.

To further illustrate this point, check out this chart. It illustrates the history of bull and bear markets. You will notice after every recessionary time in history, markets have rebounded significantly. I have used the US market as an example in the case the S&P 500, but if you were to look at the major Canadian market the TSX it looks very similar.


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When dealing in financial matters, you are urged to consult an advisor for legal, tax or investment advice. Every effort has been made to present information in a clear, exacting manner. However neither the publisher nor the authors can be held responsible for any losses incurred due to the actions of any individual as the result of this post or any errors or omissions contained herein.

Infinite Financial places mutual fund transactions through Banwell Financial Inc. and Life Insurance transactions through Bridgeforce. To learn more about these relationships - click here

 

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