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Although Canada is in fact experiencing a recession, it's worse in the US, where the recession started in 2007. In the wake of the sub-prime mortgage melt-down, stock markets face the worst bear market in history. Leading investors like Warren Buffet are warning 2009 will be a very bumpy ride.
So what's a recession? How do you know when it's over? More important, how do you survive it with your finances intact?
You may not be able to protect yourself from all the effects, but here's some actionable information to help to ride it out more smoothly.
What can you do while waiting for the recovery?
Start with these five steps:
1. Don't panic
Unless you need the money short-term, sit tight. Don't put your money in your mattress. In the past, markets have recovered their losses fairly quickly.
2. Talk to your adviser, if you have one
Even better, your adviser should have called you to discuss what's going on. Or, they should at least have sent you some written update. The good advisers are out there talking to their clients and having the kinds of tough conversations you would expect when markets are in chaos. Learn more now about what can you expect from your adviser in times like these - and how to tell if your portfolio is absorbing bigger losses than you should expect.
3. Diversify your portfolio
Too much of one type of asset can be risky - in good times and in bad. Your portfolio should be aligned with your long-term needs. It should also keep risk to a level that you are comfortable with.
4. Manage your mortgage
Your home is probably your largest investment. Take advantage of low interest rates to refinance your mortgage. (See Mortgage News)
5. Pad your piggy bank
In uncertain times, you need an emergency fund - three months' living expenses is the norm. Eliminate your credit card debt by paying off your most expensive credit cards first. But don't completely eliminate your RRSP contributions and other savings goals unless you feel there's a real risk of losing your job.
Ultimately, recessions are like many health problems - governments try to catch them early and treat them aggressively. As the patients, it's up to each of us to do our best to maintain our own financial health.
When will we start feeling better?
The US National Bureau of Economic Research has been tracking economic indicators since 1854. Their data shows recessions have been getting shorter. Since 1945, the average recession lasts 10 months, while expansions last about 57 months.
By that measure, the US should have recovered from the recession late last year. But the collapse of the housing market, paired with bank collapses in the US and Europe, have driven consumer confidence and credit supply to new lows.
Canada is in better financial shape than the US in almost every major economic measure - from vehicle sales to housing foreclosures. Our recession started a year later. Our banking system remains among the soundest in the world.
Canada's recession history
Canada survived at least three major recessions and a depression in the last century. It's interesting to compare those times with what we're going through now. In many cases, the downward spiral followed a time of great prosperity and consumer confidence – just like today.
1904-1914: The early 1900s saw a strong economic boom, with an intense wave of speculation in the New York Stock Exchange (NYSE). Interest rates were high but widely fluctuating. But in 1907, after a major meltdown on the NYSE, there was a run on US banks. Twelve major banks and trust companies folded. In Canada, this sent markets tumbling. Gross Domestic Product (GDP) dropped three years in a row.
1929-39: Preceded by a huge stock market bubble and over-optimism in the Roaring '20s, the Great Depression saw Canada's unemployment rate hit 27 per cent. After a US law jacked up tariffs and cut global trade by 65 per cent, Canada became one of the nations hardest hit by the Depression. Our GDP fell by 43 per cent.
Early 1980s: Sky-high energy prices preceded a drop in real Canadian GDP of almost 7 percent in just 18 months. Doubledigit inflation sent prime rates from 8 per cent in 1970 to a soaring 19 per cent in 1981.
Early 1990s: Interest rates hit 14 percent, while Canada's unemployment rate topped 10 per cent. GDP dropped by 2.13 per cent in a single year.
Today: In January 2009, unemployment rose to 7.2 per cent. The Bank of Canada slashed interest rates to almost zero in March 2009. And GDP dropped 3.4 percent in the fourth quarter of 2008.
If we look at the history of Canadian recession, we will begin to feel slightly better when we consider what soon followed each of them...Recovery! So although we must plan for the current times, we should also look to the times ahead.
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