Surviving the Storm: Investing During Volatile Times

Sponsored by BMO Global Asset Management

Is investing during a recession a terrible idea? If this crappy economy scares the hell out of you, you’re not alone. Crashing stocks, the cost of living, and job insecurity are making us all feel financially skittish. What if the market keeps crashing? What if I lose my job? Many of us are worried about the future and wondering how to protect our money during uncertain times.  

While it may be tempting to panic and pull out of the market entirely, Adrian Bar knows that a recession may actually present unique opportunities for growth. He’s the host of the popular YouTube channel Canadian In a T-Shirt, where he sets the record straight about all things personal finance for almost 130K subscribers. 

No matter what the economy is doing, don’t let uncertainty paralyze you. Adrian is here to give us a masterclass on how to invest during a recession with strategies to reduce volatility in your portfolio.

Who is Adrian Bar? A wealth of knowledge

When Adrian was just a little boy, his family moved to Canada from Romania – a former communist country where his parents “never had the luxury of their own bank account” For them, learning how to manage money was like learning another language. But they did understand the value of a dollar and were fluent in financial discipline.   

“They really instilled the importance of being frugal and not spending money on stupid things that will just lose value over time,” explains Adrian. Because you never know what the future holds. Unfortunately for Adrian, that was the extent of his financial education at home, or anywhere else for that matter. 

It wasn’t until he got to college that Adrian questioned if he could do more with his money. Studying to become a quantum physics professor, Adrian was already wired to ask questions, crunch numbers, and find creative ways to make everything more efficient. When he noticed his savings account was earning interest, naturally he wondered how the bank could afford to pay it – where did that money come from? 

His curiosity sparked an insatiable thirst for knowledge, like reading the entire Canadian Tax Code. During his career as an AI Engineer, Adrian spent every Thursday lunch hour teaching co-op students important life skills, including how taxes work, how to read your paystub, how credit cards work, and how to invest. 

When the same questions and pain points came up time and again, Adrian realized there was a real need for personal finance education. But most resources were unnecessarily complicated with confusing jargon. 

That’s what inspired Adrian to create a YouTube channel and Instagram account that breaks down complex financial information into easy-to-understand language. Here’s what he had to tell me about market volatility and investing during a recession.  

Adrian, what is volatility? 

Everyone knows the stock market can be a rollercoaster, right? It’s called market volatility, and it means the prices of stuff like stocks, bonds, and commodities can go up and down super fast and without warning. This can be pretty scary for everyone because it makes it hard to predict what’s going to happen next and no one likes to lose their hard-earned money. 

Take a breath, these ups (bull markets) and downs (bear markets) aren’t anything new. They’ve been happening for as long as the stock market has existed and it’s totally normal. 

Volatility is influenced by forces like how well the economy is doing, politics, interest rates, global events, and even how people feel about investing. Volatility in and of itself isn’t a bad thing, it’s how you cope with it that counts. 

When in doubt, zoom out

Recessions are scary and it’s easy to get spooked. Panic selling when markets dip can be a big, expensive mistake. Investing for the long term is the easiest way to protect your portfolio from volatility. Why? 

History has shown us that the stock market has always recovered from crashes and gone on to new highs. Statistically, short-term investing is more like gambling, while holding for the long term is the most effective strategy. Here’s how Adrian explains it:

“There was a comprehensive study done to assess the performance of the US stock market over the last 100 years using different time horizons. And what they found was that if you were to invest your money for just one day, you had a 54% chance of making money and a 46% chance of losing money. If you invested for one year, your odds of making money increased to 74%. If you invested for 10 years, your odds of making money increased to 94%.¹ 

Better yet? Over the last 100 years, there has never been a 20-year period where the stock market didn’t make money – and that accounts for major downturns like the Great Depression, the Dotcom crash, and the 2008 Global Recession.” ¹

By holding onto your investments for as long as possible, you can ride out the bumps and dips of the market and not let the short-term stuff stress you out too much. If you’re in it for the long haul, you’ll have a better chance of making a profit in the end because, over time, markets have historically gone up, despite any short-term craziness.

Diversify your portfolio

One of the most important things you can do to reduce volatility in your portfolio is to diversify your investments. This means spreading your money across different types of assets like stocks, bonds, real estate, and commodities. By doing so, you reduce the risk of losing all of your money if one asset class performs poorly.

An easy way to diversify your portfolio is with broad-based index funds, like an Exchange-Traded Fund (ETF). ETFs can track a specific market index, like the S&P 500 Index (BMO S&P 500 Index ETF – ZSP), NASDAQ 100 (BMO NASDAQ 100 Index ETF – ZNQ), or TSX Composite (BMO S&P/TSX Capped Composite Index ETF – ZCN) for example. Those ETFs are built to replicate the performance of a particular index by holding the stocks and other securities that are tracked on it.  

As Adrian puts it, “instead of picking one stock hoping that it succeeds, you’re investing in dozens or hundreds of stocks all at once. Yes, some of the stocks in your ETF will lose money, but most of them will gain money.” 

“The beauty of this approach,” explains Adrian, “is that it’s a passive way to grow your money. Especially for new investors who may not have the skills or confidence to assess the financial statements of every company they want to invest in.”

Keep calm and bargain on

If you’re already in the market, check yourself before you wreck your wealth. It can be tempting to panic sell during a downturn. Remember, stock prices fluctuate due to short-term events and external factors that don’t always accurately reflect the true value of a company. Try not to get too caught up in the short-term volatility. Here’s how Adrian looks at it: 

“If it’s a quality company that’s been around for a long time and continues to earn a profit during a recession, but the stock is trading at a 20% discount, that’s when I like to jump in and buy more, “ he says. 

If it’s a dividend-paying stock, Adrian explains that “buying at a 20% discount gives me two benefits. First, I can purchase 20% more shares with the same amount of money, essentially locking in a 20% higher dividend yield. Second, since I bought the shares at a discount, when the market recovers the stock will also recover. That gives me easy capital gains.”

Think of it this way: it’s not a crash, it’s a flash sale. Recessions can be a great opportunity to scoop up quality assets while prices are down. Look for solid companies that are established, have been around for a long time, and still have strong fundamentals despite what’s happening in the market.

Dividend-paying securities 

Even when the economy is in the toilet, dividend-paying stocks can add value to your portfolio. Companies that continue to pay dividends despite market downturns are often established and well-managed, which means they’re far more likely to stick around well into the future. 

For those who are not stock pickers, an option is to invest in more diversified ETFs that hold a higher proportion of dividend-paying assets. “For example,” says Adrian, “there are ETFs that only track the top six banks in Canada (BMO Equal Weight Banks Index ETF – ZEB), so you don’t have to try and predict which one will perform the best.” 

Canada’s Big 6 Banks are considered Dividend Aristocrats because they have a long history of paying and raising their dividends. They are well-established, profitable companies that have weathered many economic cycles, including recessions, and have continued to pay dividends to their shareholders throughout.

Another example are Real Estate Investment Trust (REIT) ETFs. We all need somewhere to live and do business. A REIT ETF is an exchange-traded fund that invests in a diversified portfolio of real estate investment companies that own and manage income-generating properties like apartment buildings, office buildings, shopping centers, and more.

Defensive securities

Defensive stocks remain relatively stable compared to other stocks when the overall market faces a downturn. These include companies that produce essential goods and services we all need to buy regardless of what the economy is doing. 

“A recession is when people really tighten their budgets. If you’re not sure where to invest, look at where your money’s going right now and what you cannot live without,” says Adrian. 

We all need toiletries and hygiene products, groceries, heat and electricity, car insurance, a phone plan and internet, etc. “The companies that provide those goods and services,” he explains, “will continue to make money, even in a recession. If you see them trading at a discount, you really want to take advantage of that because defensive stocks very rarely go down in value.” 

I have a stash of cash to invest, now what? 

Assuming your high-interest debt is paid off and you have at least 3-6 months saved up in your emergency fund, the next step is to get your extra cash in the market. Dropping a large lump sum might be quick and easy but it can make you more vulnerable to volatility. While there is no right or wrong way to invest your money, Adrian believes there is one method that is better suited for most people, and it’s called dollar cost averaging. 

Dollar-cost averaging (DCA) is an investment strategy where you invest smaller amounts of money at regular intervals, regardless of what’s happening in the market. For example, you buy $200 worth of ETFs every two weeks on your payday, no matter what.

“If you have a pile of cash and you put all that money in today, you’re taking on a bit of a risk because you don’t know if the bottom is in or if the market will keep going down. But if you spread your money out over time, you smooth out the volatility and invest at an overall average rate of the market.” 

He then explained that countless studies have shown that not only is this the easiest and least stressful way to invest, but historically, you actually get better returns in the long run. “That’s because your biggest enemy is human nature,” explains Adrian. The DCA method removes our emotions from the equation by automating our investment strategy. It eliminates trying to time the market, which literally cannot be done.

Overall if you can stay invested over the long term you will be more likely to reach your investment goals.  ETFs provide diversified portfolio construction tools to help you access the areas of the market that are most attractive to you making them effective building blocks for investors.

¹Source: Larry Bates, Beat the Bank.

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