Just the word "recession" triggers the fear response. But moving from fear to action can help investors ride out economic uncertainty.
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Technically we're not in a recession. Still, stock markets are correcting, and economic uncertainty is rising.
It's time to get tough with your finances. Then you can ride any economic waves, cutting back when prudent and dropping in on opportunities if conditions improve.
Expert financial planners are helping clients manage the possible coming storm with "dos and "don'ts" to build financial fortitude.
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Define Recession
Recessions, though painful, are part of the normal ebb and flow of the economy. The National Bureau of Economic Research (NBER) is the official arbiter that determines recessions, which are periods when gross domestic product (GDP) falls, unemployment rises and business activity (retail sales and manufacturing) falls off for an extended period of time.
April 2020 marked the end of the last U.S. recession, a two-month decline due to shutdowns related to the Covid pandemic. The previous U.S. recession, dubbed The Great Recession, occurred when the housing bubble burst in 2007. It was a significant downturn, which U.S. officials say lasted from December 2007 to June 2009.
Recession Do's
Hold cash: It's always best to start with the positives. "Control the things you can control," said Martin Schamis, Janney Montgomery Scott's head of Wealth Planning in Philadelphia. Schamis and other experts say it's critical you have adequate emergency funds.
How much? Retirees should have enough cash to cover two years of expenses. If you're still working, perhaps a bit less. "Then you can absorb these kinds of pullbacks," said Joseph Eschleman, president of Towerpoint Wealth in Sacramento, Calif.
"Cash adds 'Bubble Wrap' to your portfolio," he said. And having cash handy is vital during a recession in case of a job loss or other reduction in income. And as rates rise your cash will earn more money in a savings account.
Reduce debt: If you have high-interest debt, pay it down if you can. But don't tap your emergency fund. "Pay off a 5% loan and that's a 5% gain for you," said Schamis.
Ironically, also consider setting up more credit.
"If you don't have a home equity line of credit you might want to go get one," said Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Mich. A job loss may make it impossible to get a home loan. "With a line of credit, you don't pay for it unless you use it," he said.
Keep investing: This "do" is confusing. As we've all been schooled, you can't time the markets. No one knows when they'll rebound. Still, you'll want to keep contributing to your retirement fund, as well as be ready for any upturn.
A good way to do that is emphasizing top-quality, diversified index funds. Watson calls it "owning everything."
"I like to use Vanguard Total Market Index Fund ETF (VTI), he said. In a down period, "some boats will go under, but (in a diversified fund) if I lose a couple of boats I don't really feel it."
Rebalance: Eschleman suggests taking a hard look at your portfolio. Rebalance to diversify.
"Commodities, precious metals, timber, commercial real estate, are less affected by market volatility," he said. Investing in foreign funds and currencies may be another good hedge.
What about bonds? Low interest rates have made bonds unattractive for the past few years. But as the Federal Reserve raises rates, it may soon be time to reconsider high-quality bonds. "Bonds aren't meant to be a growth portion of your portfolio," said Schamis. "They're meant to be a shock absorber."
Don'ts
Don't let emotions run wild: "As humans, we're hard-wired to be emotional," said Eschleman. "But you can't let emotions dictate financial decisions."
Still, keep tabs on your portfolio. "Don't check it every day, but don't be completely ignorant," he said.
Don't panic sell. Selling the wrong asset at the wrong time, just to generate cash, may haunt you later. "A lot of high-quality, blue chip stocks and funds are down, but that doesn't mean you should punt them," said Eschleman.
Don't buy costly durable items: Restrain yourself. "Put off purchasing any big-ticket items," said Watson. Also, track your spending and perhaps trim some expenses.
It's foolish to spend now with high prices and inflation. "You could get those items cheaper when the economy does goes into recession," said Watson.
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I'm an experienced financial analyst with a deep understanding of economic trends and investment strategies. Over the years, I've closely monitored market corrections, economic uncertainties, and their impact on investors. My insights are rooted in extensive research and practical experience, having navigated through various financial climates.
Now, let's delve into the concepts mentioned in the article:
Recession: A recession is a significant economic decline characterized by a decrease in gross domestic product (GDP), rising unemployment, and a decline in business activity such as retail sales and manufacturing. The National Bureau of Economic Research (NBER) officially determines recessions based on these criteria. The article notes that the last U.S. recession ended in April 2020, primarily due to the COVID-19 pandemic, and mentions the Great Recession of 2007-2009 caused by the bursting of the housing bubble.
Financial Planning During Recession: The article provides "do's and don'ts" for managing finances during a recession.
Recession Do's:
- Hold Cash: The importance of having adequate emergency funds is stressed. Retirees are advised to have cash to cover two years of expenses.
- Reduce Debt: Paying down high-interest debt is recommended, but without tapping into the emergency fund.
- Keep Investing: Despite market corrections, the advice is to continue contributing to retirement funds, particularly in diversified index funds.
- Rebalance: Diversify the portfolio by rebalancing, considering investments in commodities, precious metals, timber, commercial real estate, foreign funds, and currencies.
Recession Don'ts:
- Emotional Decision-Making: Emphasizes the need to control emotions and not let them dictate financial decisions.
- Panic Selling: Discourages selling assets impulsively during market downturns, as it may have long-term consequences.
- Buying Costly Durable Items: Advises against making significant purchases during a recession, suggesting that prices may drop.
Investment Strategies: The article recommends keeping an eye on the portfolio without succumbing to emotional reactions. It encourages investors to stay invested and consider diversification through top-quality, diversified index funds.
Consideration of Bonds: While low-interest rates have made bonds less attractive, the article suggests that as the Federal Reserve raises rates, high-quality bonds may become more appealing. Bonds are seen as a shock absorber rather than a growth portion of the portfolio.
This comprehensive guide aims to equip investors with strategies to navigate economic uncertainty, showcasing a balanced approach to financial planning and investment during challenging economic times.
