The US is officially in a recession…
Well, there’s no surprise here. I’m not sure that there is anyone that thought we would not be experiencing a recession at this point in time. Stating that it’s “official” simply means that the historic numbers support the definition of a recession. Two consecutive quarters of no or negative economic growth. So, what should you do with your money now? Fundamentally, the same things you should have been doing before any of this started. However, the headlines about a recession are and should be a reminder of one important point that the article does address. Because the “official” announcement of a recession is almost always going to follow a significant drop in the market, it does serve as an important reminder. A reminder to check your PLAN and Portfolio.
If you are young and everyone is telling you, “don’t worry, you’re in it for the long haul, the market always comes back,” think about how you would feel if you “weren’t so young?” This, a recession, a significant market correction, will happen again. As a matter of fact, a 20% drop in the market happens, on average just over every 400 days. If you know there is a very strong probability negative in your future, doesn’t it make sense for you to plan for that now? Reacting to market and economic conditions after they have happened will have minimal if any benefit. So, don’t think of reacting to a past event, but preparing for the inevitable future.
If you are older and beginning to prepare or are entering retirement and you didn’t have a plan for such an event, now may not be the best time to make significant changes. It is a great time, again, to prepare for the next negative event, and finally, if you are someone that does have a plan in place, hind-sight is 02/20. How has it worked out for you?
The primary point in all of this is that a significant drop in the market and living through a recessionary period provides us with important information. First and foremost, how does it feel? As they say history has a way of repeating itself and after long periods of economic growth and the market moving up people tend to become complacent. We constantly hear people say things like, “I have that taken care of,” or “My spouse takes care of that,” and even “I have an advisor.” Yet the statistics show that the months after large market corrections is the time when there is a spike in investors moving their money. Internet searches on investment and money advice also spike during tough economic times. Now is a very good time for a gut check. Be honest with yourself. If you don’t like how your financial situation feels, then now is a very good time to start creating a PLAN.
Second, if you have a plan, does it include enough of a cushion to get you though a period of market pressure and allow you to minimize the distributions from your nest egg? If not, you may need to go back, when the time is appropriate and adjust the amount of money you have allocated to “safe assets” like cash.
Third, how did your portfolio hold up? Warren Buffet once said, and I’m paraphrasing, “When the tide comes in everyone’s boat floats. But when the tide goes out you see who is swimming naked.” A strong market and or a few strong positions can sometimes compensate for a poorly constructed portfolio. These weaknesses can be reviled in rough market condition. Our fixation on return can at times distract us from another very important variable when investing, risk.
Pause, assess and then take action based on your financial situation, not because the market dropped or just had a historically recover or we are now in a recession. By the time people will have read the headline, worried about it, decided on a course of action the economic climate will have changed and there will be a new headline. Remember, it is your life, build a plan that supports your life then a portfolio that supports the plan.