A doomsday prepper has a stockpile of equipment, food, water, medical supplies and more. Each of these items has uses in the event the world enters a doomsday scenario. These necessary items may never be needed, but they provide a buffer against a so called, doomsday. Recessions can feel like a mild doomsday, especially from a financial standpoint. And, I would argue that a recession is a little more likely than doomsday. Recessions are just part of an economic cycle and they all have different impacts on financial markets. Just like any prepper, you must have a proactive approach to planning, rather than reactive. Most people today suffer from recency bias, meaning they feel like the next recession will be as bad as the last one. The recession occurring Dec 2007 through June 2009 included one of the worst stock market performances during a recessionary period. Surprisingly, on average, markets are down about 4% during a recession. This number includes a wide variation of returns but shows that markets have been both up and down during these periods of economic weakness.
Here is a chart of the unemployment rate and recessions (shaded region). As you can see, the US averages about 1.5 recessions per decade. In our current decade, we have not had a recession. If that holds, it’ll be the first decade the US has not had a recession.
How do you get ready for the next recession?
According to Go Banking Rates, 68% of Americans have no recession investment strategy. A recession is bound to happen one day and it’s not about reducing your stock exposure or trying to time the market. Investments are important, but there is more you can do the ensure you are recession ready. It also depends on where you are in life, whether you are just starting your professional working career or retired.
Recession and Your Career
If you’re still early in your professional career, you are what can be called an early accumulator. In this stage, you should be less concerned with the volatility of financial markets. It’s more about minimizing your exposure to debt and building a fully funded emergency fund. An emergency fund is your financial backbone, particularly in a recession environment. If you lose your job or have wages cut, you’ll want to have funds to fall back on, and this goes for any stage of your career. It’ll be less financially stressful to use savings to get by, rather than racking up debt and paying additional interest. If you must add debt during an emergency, it’s likely you’ll be in a worse spot than before and won’t be able to take advantage of a recovering economy.
As you get midway into your career, the core principles still apply as far as debt management, savings, and continuing to accumulate your investments. Eliminating debt as much as possible at this point will give you a margin of safety, especially since there are more expenses at this stage of life. This is also when financial planning starts providing more of its value. Short-term goals must be separated from long-term goals, whether a child’s college fund, vacation, or retirement. Debt and savings should be under control, allowing investments to be structured properly to match the time frame for each goal. (For example: Maybe you have a savings fund for a vacation next year. This is a short-term goal and should be kept in an interest-bearing vehicle that matures before you need the funds. Saving for child education should be in short to medium term investments that have less market exposure as they near the goal. And of course, retirement is long term and should be invested for the long-haul to match your risk capacity and tolerance). If you have checked all the boxes, you should never need to take early withdrawals from retirement during a recession.
5- 10 years from retirement is when many people realize they need to start developing a retirement plan that includes income. You still want to be accumulating assets, but it’s important to ensure you have a sound financial plan. The sequence of returns risk can be a setback if your asset allocation doesn’t match your risk. Asset allocation becomes a key component when nearing retirement. A stable income plan is crucial in your overall retirement portfolio and will allow you to worry less about how the market can impact your investment portfolio. Also, old 401k plans can be tracked down and consolidated. It’s important to consolidate these accounts which makes planning easier to manage and add simplicity.
Recession and Retirement
Retirees can no longer rely on a steady paycheck and a recession can be daunting if relying on income from investments only. If you retire during the wrong economic cycle, the sequence of returns can deplete an account quickly if you are taking income from those investments. If an income plan is in place, you’ll worry less about how markets are reacting to the latest news story. An income plan creates a margin of safety for a retiree, so they know every month the bills will be paid. The growth part of your plan can continue to be invested in the market unless needed for discretionary spending. If you don’t have an income plan in place, your plan is vulnerable in a recession.
What Else Can You Do?
You can also use your human capital to increase the odds of making it through any recessionary environment. Since your career is what provides the income to build a financial plan, think about increasing value in your current role. Learn new skills that can make you invaluable where you work. This lowers the risk of being laid off during tough times and will allow you to keep your financial plan in check. On the b
right side, if you maintain your job during recessions and market drawdowns, dividends and contributions can be invested at lower prices. Who doesn’t like a sale?
Recessions happen, market draw-downs happen, life happens. That’s part of putting money to work in financial markets in return for wealth creation. Create a firm understanding of your financial plan. Build your finances and investments around your risk and stage of life while creating a buffer against shocks that can occur. A recession will happen, we just don’t know when. Be a survivalist during the next recession. Talk to us if you want to see if your plan is prepped for a recession.