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How do you invest for a recession?


Over the last few days I have been living on a houseboat travelling down a river on the island of Borneo in Indonesia in search of endangered orangutans. To say the least, cell phone coverage was sparse on the trip, but as I have just re-entered 'modern civilization' my phone started blowing up with the news of the last few days. What I have found particularly interesting from this blast of information is that even though I hadn't been in tune for the day to day (minute by minute) fluctuations of the twitterverse and the markets, nothing had ultimately changed from start to finish.

Now, we are talking about an extremely short period of time but this barrage of short term information reminded me about how the markets react in the short term (which can extend a couple of years) and more importantly how people behave based on the news and the market volatility. More recently, the 'R' word (recession) has been in the headlines a great deal and it has left many people asking the question, what should I be doing in my portfolio to prepare? This is a dangerous question to be asking because it implies that investors and advisors can predict the future.

I Want to be Very Clear

This is not the case and it is an extremely dangerous claim as even if someone guesses correctly at one point, they will eventually guess wrong and that could cost you a great deal of money. It's true, there are more signs today pointing towards a US recession but whether or not it will happen in the short term is not a forgone conclusion. So given the fact there is no certainty around the timing of the next recession, how should one invest?

The truth is, their strategy shouldn't change. If you are employing a disciplined and responsible investment strategy your portfolio will react to changing conditions based on opportunity available and not based on the mythical belief that someone has the crystal ball. At Endeavour we have strategies related to 3 core components of portfolio design which helps us to have better control of the experience we want our clients to have and based on their comfort levels.

These three areas are:

Asset Allocation – What percentage of your money is invested in a variety of asset classes. Diversification can help limit the volatility in your portfolio so depending on your comfort for volatility and your need for growth as prescribed by your financial plan, we design your allocation accordingly.

Stock Selection – We have a very specific methodology for how we choose individual securities, especially stocks. To summarize briefly, we buy high quality assets and we ensure we don't overpay for them. If we do not find opportunities, we do not allocate funds in our asset allocation to these areas. Essentially our process and our fundamentals around decision making remove the need to pretend that we can predict the future.

Rebalancing – Setting an allocation is important and in fact likely the most important determinant of your investment experience, however, we cannot set it and forget it otherwise you will become overconcentrated and leave you open to unwanted volatility. I see this happen often to investors after long runs in the market both up and down.

In up markets people often tend to take on more volatility than they are comfortable with in search of more growth and they fall victim to the short term belief that things will always continue higher. The opposite happens in downward markets as people remove more volatility than they should and incur the opportunity cost of missing the rebound often thinking that they will wait to reinvest until the market recovers. The problem is that the best days of the recovery are often the first few days.

I have written a few times before about how investors should resist their own human nature when it comes to investing and avoid the ill-informed advice that would lead them to believe that some people can foresee the future of the markets and the economy. Admittedly, I still feel the pull of these influences as well and being disconnected is not the most comfortable feeling for me as well but I feel that this recent experience of mine was a good reminder to share. There is not substitute in investing to a strong, disciplined investment strategy. Stick to your guns, especially as others are tempting you away from it.

- Grant White, CIM, CFP

Grant White is an award-winning Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.


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