If a recession is coming, or here already, does it make sense to withdraw from my TFSA investments? Why or why not?
An economic recession is a period when the economy slows down or declines. A recession often goes hand-in-hand with lower stock prices, more unemployed workers, and stagnant wages.
Since stock prices dip during a recession this can make people who have invested nervous and question whether they should take their money out of the stock market before prices drop further.
My response to whether it makes sense to withdraw money from investments and put this money elsewhere, like a savings account, depends on two factors.
First, do you need the money currently tied up in investments in the next three to five years? If you’re planning a big house purchase in the next few years or you’re going to be retiring in the next three years, you might want to take your money out of the stock market now. It’s better to sell now, when there is a slight dip, than to wait two years and then try to sell your stocks when the prices are lower. Assuming we are at the beginning of a recession (and it looks like we probably are) then it makes sense to cash out now if you need to use the money in the next three years.
However, if you don’t need the money from your investments within the next three to five years then it makes sense to leave your funds in the stock market. The reason is recessions usually only last two to three years. The stocks that tanked in the 2001 dot-com crash mostly recovered by the end of 2003. The stock market dropped heavily in 2008, but were largely back on track two years later. The market slowed down in 1990, but had bounced back by 1995.
Basically, on average, a recession tends to happen around once per decade and last a year or two. Assuming you don’t have any big purchase plans (house, retirement, new car) planned in the next two or three years you can wait for the market to recover and bounce back.
The second consideration though is whether your other finances are in good shape. Are you carrying a lot of credit card debt? Have you borrowed money to by stocks? Are you living paycheque to paycheque? If the answer to any of these questions is “yes” then it’s probably a good idea to cash out now. Recessions are a volatile time for not only the stock market, but employment too. If you’re in debt or don’t have a cushion in your bank account that could support you for a few months, you should probably sell stocks to pay off debts and give yourself a small safety net.
A year from now you don’t want to find yourself unemployed and with stocks worth two-thirds of what they are now. It would be better to sell the stocks and wipe out your debts now.
On the other hand, if you have a little money in your savings account that will act as a cushion and no debts, then leaving your money in the market makes sense. The market will turn around, probably in the next two years, and then the value of your stocks should grow again.
In short, whether you should sell now or wait out the recession hinges on whether the rest of your finances are in good shape. If they are, you can afford to hold in there and wait this out. But if your finances are shaky, then it’s a good idea to cash out stocks now to reinforce your bank account and debt payments.
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