Recession-proofing for Canadian millennials

Andrew Willis: The R word or recession has been making quite the appearance in the media lately. With attention on the Canadian housing market, debt levels and the ominous interest rate phenomenon known as the inverted yield curve, Canadians maybe wondering how to best get their financial houses in order ahead of potentially stormy weather. Previously, we discussed personal finance and investing best practices for retiree households in the event of a recession. Today, we are going to the other end of the spectrum with advice for those millennial households out there. Joining us again to discuss the best path forward for young Canadians out there in this uncertain economic environment is Howard Kabot, VP of Financial Planning at RBC Wealth Management.

Howard, thank you again for joining us today.

Howard Kabot: It's nice to be back.

Willis: When someone in their early 20s to late 30s comes up to you, a millennial, and they ask you about a recession, something they might not have experienced yet, what are the first few things you say to them?

Kabot: Well, there's a lot of advice we like to give to millennials, but the first place we would start is about getting their financial house in order. This typically comes about from having a financial plan prepared. Millennials typically don't have a financial plan. So, we would recommend that they go see a professional planner or a professional advisor who would help them prepare a plan. The financial plan will identify risk opportunities for them. It will identify areas for future savings. It will look at cash flow, debt reduction. And these are all things that we think a millennial should think about.

Willis: When it comes to debt, household debt, particularly around mortgages as first-time homebuyers, what do you say to millennials when you ask you for advice?

Kabot: Well, millennials are typically going into their first homes, sometimes it's a second home, a move-up home, one of our concerns is taking on too much house and too much debt. Millennials – and this relates back to my previous comment on preparing a budget and the financial plan – need to be well aware of their tolerances for spending too much and being able to manage their monthly mortgage payments. Interest rates are low now. So, it might look very manageable. But in the future, when interest rates rise, then that monthly mortgage payment might get tougher to make. So, be very cautionary. However, while rates stay low, they might want to think about taking advantage, especially if they have available cash flow to pay down their mortgage on a monthly basis and make lump sum payments towards principal. If they have credit card debt, we would caution against that. It's very expensive debt. Probably want to take out a line of credit to pay that credit card down. But really, be careful of the debt and make sure you can manage the monthly payments.

Willis: Now, in our last segment we advised for retirees out there. But there are some retirement implications for millennials, aren't there?

Kabot: Definitely. Millennials typically are in their 20s and 30s and retirement is a long way out, 30 or even 40 years and it can be tough to start to think about retirement when you've got a mortgage payment and maybe young family and expenses to pay. But to the extent that you can start to even put a few thousand dollars away on a yearly basis with the magic of compound interest, you will end up with hundreds of thousands of dollars when you eventually retire. So, thinking about starting to save for retirement is something that an older millennial definitely should do and maybe even start to crunch some numbers if you are in the upper 30s, late 30s and retirement is not that far out, so maybe it's time to think about what it's going to take, how much am I going to need and how much should I be saving.

Willis: Lastly, although often associated with debt, millennials have also been called super savers as they enthusiastically enter the world of investing. What advice do you have for young investors starting out their portfolios today?

Kabot: So, typically, in a recession, equities are going to underperform, and investors will typically shy away from equity markets and rightly so. But this actually can be a really good time to pick up some really good companies at very modest prices. They are typically considered to be on sale. So, if you can find good companies at sale prices, then picking these shares up can be a very good thing. Millennials typically have a much longer investment time horizon. They are going to be holding on to these companies for potentially 30 years or more and as a result can get some very good performance. And we know over the long term the equity markets perform very, very well. So, the recommendation would be, don't be shy of equities, but also be focused on a managed portfolio. Certainly, cash and fixed income has its position in the portfolios as well. So, stay balanced, but don't be afraid of equities.

Willis: Howard, thank you again for joining us today.

Kabot: My pleasure.

Willis: For Morningstar, I'm Andrew Willis.