Tariffs: How to protect your investments

The domino effect of tariffs

Could your investments or pension fund be affected by tariffs?

With an economy that has relied on free trade for decades, tariffs are definitely going to affect your return on investment.

Stock markets perform better when things are stable. The more predictable the situation, the more confidence investors have. Confidence is essential for positive returns because it means that companies can better plan, invest and grow. And it's this what fuels long-term prosperity.

Trade wars (such as those between the US and China) and tariffs cause uncertainty. Stocks fall. Uncertainty, especially with respect to international trade, sets in. Investors lose confidence and become more conservative.

What should you do with your investments

It's hard to not to panic when the stock market seemingly reacts every time Donald Trump makes a move! However, when it comes to making sound financial decisions, it’s important to stay calm.

Before pulling out completely or shuffling your portfolio, take a deep breath. Be reasonable—not emotional—because you don’t want to make a rash decision.

When investing in equities, uncertainty is par for the course—just think of the dot-com crash of 2000, the 2008 financial crisis and, most recently, the pandemic. Yes, the markets crashed, but all was eventually recovered (This hyperlink will open in a new tab) and growth happened.

Changing course?

Before making any changes to your investments, take the time to reassess your strategy.

Have your financial goals changed? If they've haven’t, then stay the course. If they have, you might want to review your plan with your advisor.

What about your tolerance to risk? Tolerance is all about accepting short-term fluctuations. Patience is a virtue when it comes to achieving your investment goals. If tariffs are pushing you invest in safer options, then you may have a low tolerance to risk.

What about your investment horizon? This is the amount of time you plan to hold on to an investment before cashing in! If your horizon is four to five years, you could consider staying the course.

However, if your horizon is three years or less, you should consider investing more conservatively and avoid exposure to market volatility. 

Diversification is key

Diversifying your portfolio is one of the best ways to reduce risk because different sectors perform differently under various market conditions. Moreover, spreading out your investments geographically will limit the impact of downturns in any given region.

Therefore, a diversified portfolio will include Canadian, U.S. and international equities in an effort to offset losses in one market with gains in another.

The business sectors that are more resilient in difficult times are:

• Consumer staples (people need groceries, even in times of crisis)
• Health and social services
• Telecommunications

Technology, the automotive industry and agriculture are less so.

Combining stable business sectors with less stable ones gives you a better chance of weathering the storm.

Regular investing

Investing the same amount several times a year is a simple way to reduce risk. When the markets go down, buy more. When they go up, continue to invest as usual. It's a strategy aimed at smoothing out the ups and downs.

The idea is to avoid investing all your money at the wrong time. And, best of all, you won't miss the recovery. When markets fall by 20%, it's a bit like a discount. This method could save you a lot of stress.

On the verge of retirement?

If you’re one of the lucky few to have a defined benefit pension plan, good for you. Your retirement income is predictable. However, your contributions may increase during a prolonged crisis.

If you have a defined contribution pension plan, or a group RRSP, check to see if you can diversify the investments that are made with each paycheque.

The longer you have before you retire, the more likely the markets are to rise. So, plan you strategy accordingly.

When retirement is less than five years away, it's a good idea to be more conservative... even if it means lower returns. As the saying goes: slow and steady wins the race!

What to keep in mind about market downturns

Despite uncertainty, it’s important to never say never. On the contrary! Keep up your good savings habits until the markets go back up.

How much to invest?

Are you familiar with the 50/30/20 budget rule? It refers to splitting after-tax income as follows:

• 50% for needs (housing, food, transportation, etc.)
• 30% for wants (hobbies, entertainment, travel, etc.)
• 20% for savings (projects, retirement, emergency funds)

Organize your expenses to see where you can save.

The 50/30/20 rule is a great way to start, because it can be adjusted to your personal goals and financial situation. When your budget is too tight, consider tapping into your emergency fund.

How to mitigate the effects of economic uncertainty?

Reaching your financial goals requires a plan. Start by integrating short-, medium- and long-term objectives into your budget. Your advisor can help you with this.

Information is good for money management

A better understanding of money means better management decisions. By educating yourself, you can do your best to avoid pitfalls like high interest rates, risky investments and bad good ideas. Above all, you'll be independent, less stressed and more confident.

Not sure where to start? Watch one of our free webinars.

Reduce your debts

Debts, especially credit card bills, are bad for your financial health. Pay them off as soon as possible to unburden your budget and rest easy.

Create an emergency fund

The amount to keep in an emergency fund should be equal to three to six months' worth of living expenses. Consider putting this money in a high-interest savings account, which is risk-free. By having the money to pay for unexpected expenses, you’ll breathe a little easier.

Do you want help?

Call one of our advisors. They can help you make it through periods of uncertainty.