Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Bad News in the Economy Means Good News for Canadians Building Wealth

Published 2022-06-27, 10:15 a/m
Updated 2022-06-27, 10:15 a/m
© Reuters.  Bad News in the Economy Means Good News for Canadians Building Wealth

© Reuters. Bad News in the Economy Means Good News for Canadians Building Wealth

The economy is not in good shape. High inflation in groceries, gas prices — you name it — is affecting people’s livelihood. Central banks are increasing interest rates swiftly to put inflation back under control, but this will take time to take effect. While they aim for a soft landing, it cannot be helped that the risk of a recession has increased.

The U.S. and Canadian stock markets have responded by correcting with the U.S. already in a bear market. In my spring cleaning, I dug up my notes of a quote from an unknown book that describes perfectly today’s opportunity for Canadians to build wealth:

“Value investing believes no single factor tends to lower one’s risk more than buying a company at a favourable price.”

In other words, by investing during a market correction, Canadians can position themselves to build wealth when the market recovers. You can invest in a broad market index, such as the SPDR S&P 500 ETF Trust. The U.S. stock market index is more diversified than a broad Canadian stock market index, which is more concentrated in financial services, energy, and materials, which makes the former a better choice in general.

Alternatively, you can invest in individual stocks that have fallen meaningfully in this market downturn. The precondition is that quality businesses must be behind these stocks. After all, other than investors buying at favourable valuations, long-term returns of stocks are also driven by the business performance of the underlying businesses.

For example, from a long-term investment perspective, big Canadian bank stocks are getting attractive with Bank of Nova Scotia (TSX:BNS) and CIBC (TSX:CM) offering yields of 5.45% and 5.25%, respectively, at writing. Both are excellent considerations for passive income in this correction and an eventual rebound of their stock prices.

No matter which stocks (businesses) you decide to invest in, don’t expect a quick rebound, though. Specifically, if you plan to use the money elsewhere within one year, you should keep the money in cash or cash equivalents. Usually, it would be safe to have an investment time frame of at least three to five years. This also allows time for your investments to grow meaningfully.

A reversion to normal markets over the next five years can lead to annualized returns of about 12-14% in an investment in Bank of Nova Scotia or CIBC stocks today. These returns include the works of dividend income, earnings growth, and valuation expansion back to normal levels.

Online brokerages like National Bank of Canada (TSX:NA) and Wealthsimple offer commission-free trading. So, there’s no excuse not to put excess cash to work. Investing in quality stocks can work beautiful for long-term goals such as saving for a car, vacation, home, or retirement.

Investments of $3,600 a year (by saving $300 a month) leading to returns of 7% annually will transform into $157,915 in 20 years. On a 13% rate of return, the result would be $329,292.

I know it’s tough to save in today’s high inflationary environment. But if you could reduce spending on discretionary items, you would be able to invest in the current stock market correction at cheaper stock prices and turn that into greater wealth down the road. Essentially, it’s delaying gratification today for future wealth.

The post Bad News in the Economy Means Good News for Canadians Building Wealth appeared first on The Motley Fool Canada.

The Motley Fool recommends BANK OF NOVA SCOTIA. Fool contributor Kay Ng has no position in any of the stocks mentioned.

This Article Was First Published on The Motley Fool

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.