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When Canada was last hit by a major recession in 2008, today’s youngest class of investors were just starting elementary school. Now in their late teens and early 20s, Gen Z could soon face the first prolonged economic downturn of their investor lives.

With equity and crypto markets down, interest rates and inflation rising and global events continuing to disrupt supply chains, some analysts are predicting further economic decline.

Although there is yet no consensus over whether Canada is headed toward a recession in the short term, these transitory periods – characterized by a drop in gross domestic product, consumer confidence and employment – are an inevitable part of the business cycle. Recessions can also be accompanied by acute market turbulence, but young investors are divided on how to approach such volatility.

Some are following the classic advice: Don’t panic. Tristan Walker, a recent university graduate and sustainable energy engineer in Pincher Creek, Alta., said his plan is to stay the course, possibly investing in some exchange-traded funds.

“I’m trying to use the wisdom of people that were before me. Just hold long term and you will see value,” Mr. Walker said. “Your willingness to ride out these waves is more tied to your psychology than how old you are.“

Mr. Walker’s approach follows the advice given by most financial planners – don’t sell when stocks tumble, because they will most likely rebound. Jessica Sarrazin, an independent representative from Carte Wealth Management Inc., said young investors should remember their long time horizon: “The worst thing they can do is massively sell their portfolio because things are low.”

Yet, research show that young people are more likely to do just that.

Investment data collected from Scandinavian countries between 1997 and 2015 show that novice investors tend to sell more readily in a downturn compared with their older counterparts, said Sebastien Betermier, a finance professor at McGill University’s Desautels Faculty of Management, who has been studying the data.

“Their high risk aversion kicks in, it’s precisely that type of action that generates opportunities for the more experienced investors,” Prof. Betermier said.

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Case in point: In a 2021 study of the data, Prof. Betermier said that following the 2008 recession, novices – who sold their stock in greater numbers – saw their portfolios perform “quite poorly” compared with experienced investors, who more frequently bought in when prices were low.

“So the first time we’re exposed to a downturn we tend to overreact relative to someone who is more mature,” Prof. Betermier said.

Despite the guidance not to overreact to price volatility, some young people still feel that exiting the market is preferable to watching their shares sink. Among them is Brandon Marsh, a recent university finance graduate, who said he is considering cashing out his tech shares, some of which are tied to the cryptocurrency Ethereum.

“I’m actually getting fearful to the point where I might have to do that,” he said. “I would definitely take my money out of the traditional market and just wait it out.”

According to Bradley Eizenga, senior portfolio manager at BMO Private Wealth, one key to success in a recession is emotionally detaching from the markets. But this could prove difficult for some young investors riding the highs of their pandemic gains after the early-2020 crash that largely rebounded within two months.

Indeed, Gen Z is not coming to this recession – whenever it occurs – as their parents did: Self-directed investing is now the norm, technology has made trading freely accessible, and new asset classes such as cryptocurrency have increased their exposure to speculation.

Zach Levitt, a Queen’s University student from Toronto and founder of the Queen’s Derivatives Options Trading Society, said that most young investors he knows are engaging in higher risk trading strategies involving crypto – and some are already feeling the effects of the market pullback.

“It’s an approach that has been getting a lot of positive reinforcement, and a lot of people have been caught off guard” by the recent crypto pullback, he said. He said some friends are doubling down on their speculative investments while the prices are low.

If stock markets continue to drop, Mr. Levitt said he plans to invest in biotechnology companies trading at around their cash value, and mitigate some risk by diversifying his assets.

For those with extra cash, investing in stocks when prices are low can be a good strategy, said BMO’s Mr. Eizenga. But investors should remember that a drop in stock price during a recession does not necessarily mean a company is better value. Instead, he said, the lower price could represent an issue with the company’s fundamentals.

For a safer buy, many investors hoping to buy the lows will look for stable companies with proven track records, said Carte’s Ms. Sarrazin. These include utilities, telecoms and businesses selling consumer staples such as groceries that are unlikely to go out of business during a downturn. Maintaining a diversified portfolio is key.

Investors should also consider building up an emergency fund in the case of layoff, preferably in a liquid account such as a high interest savings account covered by deposit insurance, she said.

While there remains no certainty over a recession in the short term, Ms. Sarrazin said, one thing remains constant: “It’s going to come eventually, so you should be prepared for it to come at any time.”

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