Summary
Recessions can make even experienced investors feel uneasy. Markets may fall, financial headlines become increasingly negative, and it can feel like you need to act quickly to protect your money.
In many cases, however, reacting emotionally can do more harm than the downturn itself. Recessions are a normal part of the economic cycle, and market declines have historically been followed by periods of recovery.
Understanding what is happening, keeping your portfolio diversified, and staying focused on your long-term plan can make it easier to avoid decisions you may regret later.
What Is a Recession?
A recession is a period when economic activity slows across the country. Businesses may earn less, unemployment can rise, and families often become more careful about how they spend their money.
Financial markets usually react to these concerns before the full effects of a recession are visible. Investors begin thinking about how lower spending, higher borrowing costs, or weaker business profits could affect companies in the months ahead.
This is why markets may fall before a recession officially begins. It is also why they can start recovering while the economic news still feels negative.
Why Market Volatility Is Normal
Investment markets move up and down constantly. Interest rates, inflation, company earnings, global events, and investor confidence can all influence prices.
During a recession, those movements can become more dramatic because nobody knows exactly how long the slowdown will last or how serious it will become.
Seeing your investment account decline is never comfortable. However, a temporary drop in value does not necessarily mean your long-term plan is no longer working.
Market volatility is one of the risks investors accept in exchange for the possibility of long-term growth. The challenge is staying patient when that risk becomes visible.
How Different Investments May React During a Recession
Every recession is different, and no investment performs the same way in every downturn. However, this table provides a general idea of what investors may experience.
| Investment Type | What May Happen During a Recession | What Investors Should Keep in Mind |
|---|---|---|
| Stocks | Prices may fall as investors become concerned about company earnings and the economy. | Markets often begin recovering before the economy or financial headlines improve. |
| Bonds | High-quality bonds may be more stable than stocks, although interest rates and inflation can still affect their value. | Bonds can help balance risk, but they are not completely protected from losses. |
| Cash | The value remains relatively stable and the money is easily accessible. | Holding too much cash over the long term may reduce growth and purchasing power. |
| GICs | Your principal and interest are generally protected when held to maturity, subject to the terms of the investment and applicable coverage limits. | GICs provide stability, but your money may be locked in and unable to participate in a market recovery. |
| Diversified portfolios | Some investments may decline while others remain more stable. | Diversification can reduce risk, but it cannot prevent every temporary loss. |
The goal is not to find an investment that never declines. It is to build a portfolio that balances growth, stability, and access to money based on your goals and timeline.
What Happens to Different Investments?
Stocks
Stocks often receive the most attention during a recession because their prices can move quickly.
When investors expect businesses to earn less money, they may be willing to pay less for company shares. Businesses that depend heavily on consumer spending may be hit especially hard.
That does not mean every company will perform the same way. Some businesses may continue earning steady revenue, while others may eventually benefit from changes in consumer behaviour or economic conditions.
It is also worth remembering that the stock market looks ahead. A recovery can begin before the economy itself has fully recovered.
Bonds
Bonds can help provide stability because they do not always move in the same direction as stocks.
Their performance depends on several factors, including interest rates, inflation, the length of the bond, and the financial strength of the issuer.
High-quality bonds may help soften the effect of a stock market decline, but they can still lose value. They are generally used as one part of a broader portfolio rather than as a guarantee against losses.
Cash and GICs
Cash and guaranteed investment certificates can be useful for short-term needs because their value is generally more stable.
They may be especially important if you expect to need the money soon or are concerned about job security during a recession.
However, moving an entire long-term portfolio into cash can create a different problem. You may miss the market recovery while waiting for conditions to feel safer.
By the time the news improves, investment prices may have already risen.
Diversified Portfolios
A diversified portfolio spreads your money across different investments, industries, and regions.
Some parts of the portfolio may fall while others remain more stable. Diversification cannot prevent every loss, but it can reduce the damage caused by relying too heavily on one investment or area of the market.
The right mix will depend on your goals, timeline, income needs, and comfort with risk.
Common Mistakes Investors Make During a Recession
Selling After Markets Have Fallen
When markets fall, selling can feel like the safest option. It stops the immediate discomfort of watching your account decline.
The problem is that selling turns a temporary decline into a permanent loss. You then need to decide when to invest again, which can be even more difficult.
Many investors wait until the economy feels safer. By then, the market may have already recovered a large part of its losses.
Selling may still make sense if your financial needs or goals have changed. The important question is whether the decision is based on your plan or your emotions.
Trying to Predict the Bottom
Everyone would like to sell before a decline and buy back at the lowest possible price. In reality, market bottoms are usually only obvious after they have passed.
Waiting for the perfect moment can leave you sitting in cash while prices begin rising again.
Regular investing can help reduce this pressure. Instead of trying to choose one perfect day, you continue investing at different prices over time.
This approach does not remove risk, but it can make it easier to stay consistent.
Stopping Contributions
It can feel strange to keep investing while markets are falling. However, lower prices mean your regular contribution can purchase more investment units.
This may benefit long-term investors when markets eventually recover.
Of course, continuing to invest should not come at the expense of essential expenses, emergency savings, or high-interest debt. Your overall financial situation still matters.
Reacting to Every Headline
Financial headlines are designed to capture attention. Your financial plan is designed to support goals that may be years or decades away.
Making major portfolio changes every time a negative forecast appears can lead to unnecessary stress, additional costs, and missed opportunities.
Headlines can provide useful information, but they should not replace a plan built around your personal circumstances.
How Diversification Helps Manage Risk
Diversification means avoiding the temptation to place too much of your money in one company, industry, country, or type of investment.
A properly diversified portfolio may include Canadian and international investments, stocks and bonds, different industries, companies of different sizes, and investments with different levels of risk.
Owning several investments does not automatically mean you are diversified. For example, owning shares in five Canadian banks still leaves your portfolio heavily exposed to one industry and one country.
Diversification will not eliminate losses during a major downturn. Its purpose is to help keep one poor-performing area from damaging your entire financial plan.
Staying Focused on Your Long-Term Goals
Before changing your investments, take a step back and remember why the money is invested in the first place.
Someone saving for retirement 25 years from now can usually handle more short-term volatility than someone planning to buy a home next year.
Ask yourself a few important questions:
- Has my financial goal changed?
- Will I need this money sooner than expected?
- Has my income or employment situation changed?
- Am I taking more risk than I am comfortable with?
- Is my portfolio still properly diversified?
- Am I reacting to my plan or to fear?
A recession may be a good reason to review your financial plan. It is not automatically a reason to abandon it.
If your portfolio was built around your goals and tolerance for risk, market downturns should already be part of the planning process.
Can a Recession Create Investment Opportunities?
Although recessions are usually discussed in terms of losses, they can also create opportunities for long-term investors.
Strong companies may temporarily trade at lower prices because investors are worried about the broader economy. Regular contributions may allow you to purchase investments at prices below their previous highs.
That does not mean every investment that falls is a good opportunity. Some businesses may face serious financial problems, and some investments may never return to their previous value.
The goal is not to buy whatever has fallen the most. It is to invest in a way that continues to support your broader financial plan.
Should You Change Your Portfolio?
Sometimes a portfolio should be adjusted during a recession.
Your investments may need to change if you need the money sooner than expected, your income has become less stable, your tolerance for risk has changed, your portfolio is no longer properly balanced, or your retirement plans have changed.
Changes made because your life has changed may be reasonable.
Changes made simply because markets are falling deserve more careful thought.
Before selling or moving money, consider how the decision could affect taxes, retirement income, future growth, and your ability to participate in a market recovery.
Focus on What You Can Control
Nobody can predict exactly when a recession will begin, how severe it will be, or when the market will recover.
What you can control is how prepared you are.
Maintain an appropriate emergency fund. Keep your portfolio diversified. Avoid investing money you expect to need in the near future. Continue contributing when it makes sense, and review your plan when your circumstances change.
Most importantly, try not to make a permanent financial decision because of temporary fear.
A thoughtful financial plan is not built only for strong markets. It should also help you stay grounded during difficult ones.
Speaking with an IG Wealth Management advisor can help you understand how a recession may affect your investments and whether your current strategy still supports your family’s long-term goals.
This article is provided for general informational purposes only and is not intended to provide investment, tax, or legal advice. Speak with a qualified advisor about your specific circumstances.
Frequently Asked Questions
Do all investments lose value during a recession?
No. Different investments react differently to changing economic conditions. Stocks may experience larger price swings, while cash, GICs, and some bonds may remain more stable. The results will depend on the investments you own, interest rates, inflation, and how your portfolio is structured.
Should I sell my investments during a recession?
Selling solely because markets have fallen can turn a temporary decline into a permanent loss. It also creates the challenge of deciding when to invest again. Before making changes, consider whether your goals, timeline, income needs, or comfort with risk have actually changed.
What usually happens to stocks during a recession?
Stock prices may decline when investors expect companies to earn less money. However, the stock market often reacts to expectations about the future and may begin recovering before the broader economy improves.
Are bonds and GICs safer during a recession?
Bonds and GICs may provide more stability than stocks, but they serve different purposes and still have limitations. Bond values can be affected by interest rates, inflation, and the financial strength of the issuer. GICs provide predictable returns, but your money may be locked in for a set period.
Should I continue investing when markets are falling?
Continuing regular contributions may allow you to purchase more investment units at lower prices. However, investing should not come at the expense of essential expenses, emergency savings, or high-interest debt. The right decision depends on your personal financial situation.
How does diversification help during a recession?
Diversification spreads your money across different investments, industries, and regions. It cannot prevent every loss, but it can reduce the risk of one company, sector, or type of investment having too much influence over your entire portfolio.
When should I consider changing my portfolio?
A portfolio review may be appropriate if your goals, income, investment timeline, withdrawal needs, or tolerance for risk have changed. Changes should generally be based on your financial plan rather than short-term market headlines.