You may be seeing increasing attention paid to the word recession in the financial entertainment industry. Suddenly, you've flipped on your TV to see banner headlines about the news in the financial markets, and "recession" is front-and-center.
Before panic sets in, it's essential first to understand the true nature of a recession. According to the National Bureau of Economic Research and its Business Cycle Dating Committee, a recession is a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
In other words, a recession is never identified in advance and is virtually impossible to anticipate. Former professional baseball player Yogi Berra reportedly said, "it's difficult to make predictions, especially about the future." This statement is especially true when discussing a recession, which can only be verified after its occurrence—routinely only many months after its event.
Despite these introductory warnings, the uncertainty in the economy and the financial markets may cause people to ask: how can I prepare to safeguard my net worth in the face of this current anxiety? In this blog post, we'll be discussing three actions that investors typically consider during times of uncertainty, two of which we recommend.
1. Getting out of the market quickly.
When the recession anxiety is alerted — you may feel the urge to front-run what you consider to be an impending downturn. The way to do that would be by converting stocks, and perhaps even bonds, to cash. That would certainly reduce the investment risk in your portfolio in the short-term. However, isn't volatility what we get paid for, especially in the stock markets? Wouldn't it be something if just once, a TV commentator said: "folks, I'm lovin' this volatility—there's nothing like seeing the markets increase across the board by 2%+ in a single day!" Instead, "volatility" is reserved for bad days in the equity markets, fueling our anxiety further. As emotional beings, humans are put together in such a way as to be failures at investing unless they can keep their emotions in check.
The question is, if I go to all cash amid my anxiety, what have I accomplished? Sure, a wave of calm might wash over me, but that's at the cost of accepting a return on my investments that is virtually guaranteed to reduce the buying power of my investment portfolio over time. Now the worry shifts to my future buying power instead of current volatility. Similarly, when and what is the best way to return to my diversified portfolio? How confident can someone ever be in timing that decision for a benefit? For those reasons, we typically don't advise getting out of the market. Instead, the best thing you can do is to stay the course and contact a trusted advisor for more information during an uncertain time.
2. Stay the course by re-committing to your investment policy, including a periodic rebalancing strategy.
Suppose you have enough sources of income and some conservative holdings in your portfolio that you can liquidate if your current income and cash can't handle all of your necessary expenses. Wouldn't it be better to maintain your diversified portfolio and wait for the financial markets to recover their losses? In the lifetimes of all investors now living, we have recovered all of our paper losses within five years or fewer of significant market downturns, provided our incomes and conservative holdings have been sufficient to leave our more volatile assets undisturbed. Holding to our established investment policy and periodic rebalancing may provide us with the best possible long-term financial results.
Instead of rushing to get out of the market, we suggest creating a comprehensive investment policy, together with a rebalancing strategy, with the assistance of a trusted fiduciary advisor. This strategy is a sell-high, buy-low philosophy that may provide substantial benefits for your portfolio and your peace of mind. This is a service that we routinely provide for our clients. To learn more about how you can ensure you have the right portfolio structures in place, you can schedule a consultation here.
3. Reassess your financial plan and investment portfolio.
Many situations may prompt you to reassess your financial plan and investment portfolio. For example, have you lost your job? Has a life event such as a death of a loved one, a change in relationship status, or an illness of a family member caused you to re-think your goals or strategies? Has your risk tolerance changed? These situations and many other life changes are perfect reasons to reassess your financial plan. If you decide changes are necessary, the next step is a thorough review with a competent professional.
After reading each of the three actions you can take as an investor, you're probably asking: "as an investor, how do I know which option is the best for me during times of uncertainty?" Our trusted advisors can help you answer that question. Schedule a call here.
Are you interested in learning more? Check out our latest webcast by clicking here. Managing Principal & Chief Retirement Officer Nicholas Economos, CRPS®, and Principal & Sr. Fiduciary Financial Advisor Miaciah Manuel CFP® , review Q1 of 2022 and take a deep dive into answering the question "do downturns lead to down years?"