A Recession Toolkit: Financial Experts Share Their Strategies for Preserving and Growing Wealth

With a downturn looming, three financial experts share their strategies for protecting your portfolio. Cartoon: Terry Mosher (aka Aislin)

Whether you are retired or working up to it, all the chatter about a recession might leave you feeling fretful over your finances. Stubborn inflation, rising interest rates, falling stock markets and global unrest don’t help. If you have an investment portfolio and own a home, what steps can you take to prepare for a possible economic downturn?

For advice on weathering the storm, we turned to certified financial planners Julia Chung, a partner, senior financial planner and the CEO at Spring Plans in Surrey, B.C.; Jason Pereira, a partner and senior financial planner with Woodgate Financial Inc. in Toronto; and Reagan Pflug, the owner of Networth Management in Calgary.


Make a Plan 


In an uncertain world, Chung suggests focusing on the things you can control by understanding what you want to do with your money. “What’s its job?” she asks. “If you’re not clear on that, you’re never going to make great decisions.”

Pereira’s take: “The only thing that you can control is your spending and your risk exposure.” First, create a comprehensive financial plan that summarizes what you own, what you owe, what money is coming to you and where it is going. The plan “projects that forward in line with your goals,” Pereira says. It also “makes recommendations as to how to best achieve that with the minimum amount of risk and the greatest degree of certainty.”  

The plan should include recommendations for investments that align with your risk tolerance, so you need to gauge how much you can stomach. “Only then will you actually have an idea as to how much exposure to stocks versus bonds or other things you should have.” Want to know the expected returns from different types of assets? The conservative projections published by FP Canada, the national certification body for financial planners, are a good place to start, Pereira says.


Cash Is King 


Chung is a big believer in what her firm calls the “cash wedge,” which works for anyone drawing from their portfolio for any reason. For longer-term planning, determine how much cash you need over the next one to five years, and figure out where it will come from. Ideally, you’ll have enough guaranteed investments to support those withdrawals. “Because, if what we can do, particularly during rocky financial markets, is avoid touching the equities and let them recover, then that’s going to give us a lot of stability.”


 The Upside of Higher Rates 


Rising interest rates may hurt mortgage holders, but if you’re a saver or an investor, they can be your friend. Pflug, who hires discretionary money managers, says some of the corporate and high-yield bond funds they use were delivering about six per cent as of December. “Those interest rates are really benefiting people.” GICs, which can yield three to five per cent, are becoming more of an option, too, Pflug notes.

Holding more short-duration bonds (six months to a year) can help insulate you from those that lose value as interest rates climb, he adds. Also, infrastructure funds, which have little or no correlation to rising interest rates, posted positive returns in 2022, while bonds had their worst showing in 95 years.

Wherever rates sit, Pereira says the bond portion of your portfolio should be largely static. “As bonds mature and as interest gets paid into them, they should be reinvested at new current rates. A properly run, diversified portfolio is already taking care of that for you.”


 Adjusting for Inflation 


“Higher inflation can basically cause, in a lot of ways, lower returns,” Pereira says, “so part of any comprehensive financial plan is to have it stress tested. What happens if the projections and assumptions don’t actually come true?”

When it comes to spending, some of Chung’s clients are adjusting their expectations. “It’s like, ‘OK, so $10,000 bought a trip for my entire family to Mexico two years ago, and now it’s going to be $15,000. I’m going to make a different decision.’” Keeping in mind that higher inflation won’t last, be flexible. “What we want to do is recalibrate just a little bit,” says Chung.


 Don’t Sweat the Mortgage 


“Have a really good mortgage adviser on your side,” Chung says. “One who’s not working for the lender, and is thinking about the impact it has on you.”

Chung and Pereira agree that, depending on your financial circumstances, paying off your mortgage may not be urgent. “This is a cash flow issue,” Pereira notes. He also warns against buying taxable investments over paying down a mortgage. “If someone’s at the top marginal [tax] rate and has a three per cent mortgage, paying that down is the same thing as them making six per cent guaranteed [on taxable investments], with no risk.”


Should You be a Landlord?  


Treat rental property like any other investment, Pereira advises. If you’re not making returns that are comparable to what you could get elsewhere – and are just hoping real estate will keep appreciating after a runup that’s unlikely to repeat itself – “you’re playing with fire.”

Consider the tax implications along with the mortgage rates and rental revenue, Chung says. “We could deduct the interest on the mortgage if it’s a fully operational rental property.”


Tax Rules Are Taxing 


For non-registered investments, Pflug offers a tip: Harvest your capital losses in 2022 to offset past or future capital gains. “It’s just important to be mindful of not triggering the superficial loss rules by waiting more than 30 days to buy back the same investment that was sold,” he says. “Otherwise, the CRA will deny the capital loss.”


The Buck Stops With the Boss 


For anyone who’s self-employed or who owns a business, Chung recommends finding ways to build resiliency. “What are the historical reactions of that business in a recession, and what can I do to recession-proof that business?” If you’re not confident that you’ll have access to the money you need for six months to a year, figure out what you can put aside as emergency savings. 

For a successful business owner with corporate assets and holding companies, “the tax implications of getting things right or wrong are significantly greater,” Pereira says. For example, by 2024, the lifetime capital gains exemption will let you sell up to $1 million worth of shares in your company, tax-free, as long as you know the rules. “The shares have to be sold by an individual or a trust that has an individual beneficiary,” Pereira explains. “It has to be a Canadian-controlled, small-business corporation that has, effectively, almost all of its assets invested in the running of the business.” You also need the right corporate structure in place for at least 24 months before you sell. “People screw up their corporate structure all the time and make themselves ineligible.”


Pay Attention to Your  Pension 


Lucky enough to have a pension? It helps to understand the tax treatment of this income, Chung says. “Anything that’s qualified pension income is eligible for pension income amount tax credits, both federally and provincially.” For income tax purposes, you can split the pension amount with your partner, dropping you into a lower tax bracket, Chung explains. “That’s one of the ways we can increase after-tax cash flow in retirement.”

Taking money out of your pension and other investments presents a bigger planning challenge than putting it in, Pereira warns. The Canada Pension Plan, for example, pays out 36 per cent less if you take it at 60 versus 65, but 42 per cent more if you take it at 70. “It’s actually more than that, but for argument’s sake, that’s how it works,” Pereira says. “Those decisions can have a profound impact on the security of your plan, because those pensions present a secure income stream.”


Out of a Job  


Working people should factor in the chance of unemployment, Pflug says. Pay down credit cards and lines of credit, and determine if you have enough money to cover all your expenses for six months. If you lose your job, Pflug sees an opportunity to do something new. “Do I use my change in my circumstances to re-evaluate my work or my occupation? People did that during COVID, and I think people do that in recessionary periods.” 


Your Money, Your Questions


What to ask when you’re shopping for a financial adviser? Our experts
have 10 suggestions:

What are you going to do for me on the planning side? —Jason Pereira

What is your key area of expertise? —Julia Chung

Are you a Certified Financial Planner? How long have you been a CFP? —Reagan Pflug

Do you hold yourself out as a fiduciary? —RP

Who are you going to for income planning, tax planning, insurance, liabilities and those kinds of things? If they say they are all of those things, I would run. —JC

Do you work with just anybody, or do you have a description of the people that you work best with? —RP

How many households do you serve currently, and how many do you intend to serve? —RP

Can you show me examples of work you’ve done for other people? —JP

How frequently would you meet with me in a year? —RP 

What are you paid to do, and who pays you? —JC


A version this article appeared in the Feb/Mar 2023 issue with the headline ‘A Recession Toolkit’, p. 42.