by Michael Evans, Founder & Wealth Manager
Rather than trying to react to market mood swings caused by unexpected inflation and rising interest rates, here are proactive steps you can take instead to be ready for a possible recession. While we do not have a clear crystal ball, it is better to be well prepared than not.
Each is within your control, and any of them can add real value to your financial well-being. As the late, great financial economist Peter L. Bernstein once said, “it’s not your wealth today, but it’s your future that you’re really managing.”
First, what Is A Recession? The National Bureau of Economic Research says a recession happens when there is a “significant decline in economic activity spread across the economy, lasting more than a few months.” This shrinking is measured by the GDP (gross domestic product), which is otherwise known as all the goods and services made and produced by the American economy.
What can you do now to be equipped for a recession?
How to Prepare for a Recession
- Strap in. Given the sheer volume of unfolding news of late, it’s certainly understandable if you have real concerns: Is a recession coming? What happens in a recession? Are similar mishaps heading our way? What could be coming next?
- Stick with your plan. No matter how you feel about any or all of these issues, you may be thinking twice about your investments. Should you try to shift your portfolio to higher ground, until the coast seems clear? Might these stressful times justify a measure of market-timing? If you know us well, it won’t surprise you that we’re against the idea, regardless of how the coming weeks and months unfold. Market-timing may offer brief relief, but it ultimately runs counter to your best strategies for building durable, long-term wealth. So, despite unsettling breaking news on world event, inflations energy shortages or anything else to come, we still suggest your best course is to grit your teeth and stick with your carefully structured investment portfolio. You can read more on the perils of Market Timing here, the principals haven't changed in the couple of years since we addressed this perilous topic.
- Set up or beef up your emergency/rainy-day fund. It’s great to be investing toward tomorrow. But in an emergency, you may need cash today. Be sure to set enough aside, so you won’t need to take costly loans or sell holdings at inopportune times. Ensure your emergency fund is in a fully FDIC Insured account and your balances are within the limits covered by FDIC insurance. We can assist by sending an invite to a unique cash management solution that affords us to $2 million in FDIC insurance per registration. Just contact us at email@example.com. Link it electronically to your day-to-day checking account so that you can easily transfer money between the two when you need to.
- Establish or increase your retirement plan contributions. If you do not have even close to the right amount in your emergency/rainy-day fund reserve fund and/or you find yourself in a vulnerable job position, a stressed business owner or have high overhead to support, ignore the following and attend to your reserve fund. Check out the NY Times take on How to Build an Emergency Fund in the Middle of an Emergency; every little bit can help. But IF you do, read on. The more you invest toward retirement (or similar goals), the better you can employ compound interest and market returns to accelerate your efforts – especially if your employer matches your contributions. While counter intuitive to invest in a falling stock market, you will be able to capture lower prices and accumulate more shares of your investments as markets decline.
- Revisit your estate plans. Even if you’ve already established your estate plans, if it’s been a year or more since you’ve looked at them, odds are they’re due for a refresh. Don’t let your estate planning intentions go nowhere. Read this article on the 5 Documents you may need and this article on how to choose Who Will Raise Your Children if you cannot. The unfortunate reality is pandemics come with death, and you need to provide for those who count on you and those for whom you are caring.
- Pay fewer taxes and tax-loss harvest. While we expect markets to climb over time, periodic downturns happen, like now. They can leave you feeling left out in the cold. But it is possible to pay fewer taxes and boost investment returns when markets recover. Learn the ins-and-outs of Tax Loss Harvesting here. But first, have a plan and be careful in the execution.
- Rebalance your investments. Every investor wants to buy low and sell high. What if we told you there is a disciplined process for doing just that, and staying on track toward your personal goals while you’re at it? Guess what? There is. It’s called rebalancing. On an emotional level, it can be challenging to sell what’s done well and buy more of what’s declined in value, while markets are gyrating. Rebalancing using evidence-based investment strategies makes a great deal of sense once you understand the basics, however. It offers objective guidelines and a clear process to help you remain on course toward your personal goals in rocky markets. It ensures you are buying low and selling high along the way. It may be prudent, however, to dip your toe in a little and only rebalance back partially to being fully invested back to your full level of equity exposure due to the velocity of falling markets. This is your call.
- Time for a Family Financial Audit. Managing a household is challenging enough without having everyone home from school and from work together. Are the roiling markets or the soaring costs or worse keeping you awake at night? We would suggest sitting down together with your partner and getting up to speed on where you are at now and review all things financial. Think of it as a stress-reliever. It’s comforting to be informed and educated about your money, just in case. Defuse the risks of a financial fallout now and do it together. We recommend you both become familiar with the following essentials, including what exists for each: Income and spending levels; banking and investment accounts, company retirement plans (with current and former employers); outstanding debt (including mortgages, college loans, credit cards, etc.); estate planning documents (wills, trusts, advance directives or “living wills”) and insurance policies (home, auto, life, medical, long-term care). In addition to knowing what you have, it’s important to know who you can reach out to for help. In short, essential financial know-how builds confidence and confidence can be in short supply when chaos is in the air. If a recession lasts long, you will need all the confidence you can get. Read Are Your Household Finances a Ticking Time Bomb together.
Preserve What You Have
- Cut unnecessary costs. Cancel subscriptions or services you haven’t used in months (magazines, streaming services, club memberships, work related monthly parking, etc.). Ok, keep the streaming service as we are all hunkered down with the family at home now. Be aware of the difference between wants and needs.
- Reduce debt. Consider paying off credit card balances and other high-interest loans, but only if your emergency/rainy-day fund is well funded. Then do a little of both, but have a plan and stick to it. Review your current mortgage interest rate and duration. With the recent moves downward in interest rates, this may be a great opportunity for you to refinance at a significantly lower rate. Your current employment situation my change in the future, so refinance while you are able. As you can read in our take on mortgages, maintaining your mortgage can be away to continue diversification and liquidity.
- Negotiate on the rest. Manage costs for all types of services you pay for on an ongoing basis. It’s possible you can lower prices on things like insurance and other ongoing costs by seeking periodic competitive bids. Negotiate with vendors to reduce “fee creep,” it’s especially important to evaluate your policies if you haven’t worked with independent insurance agents. Be a squeaky wheel!
Protect From Risks
- Freeze your credit. Shut out identity thieves with a freeze on your credit reports. It’s now free to freeze, and temporarily unfreeze your credit reports when needed.
- Freeze your kids’ credit. Unfortunately, kids are prime targets for identity thieves. Create and lock down their Social Security Number and credit reports, before anyone else does.
- Keep an eye on things. Order and review your free annual credit and Social Security reports.
- Access the risks of elder abuse for you or others. Whether you’re growing older yourself or you are the son or daughter of an aging parent, it’s hard to imagine a day might come when we who have spent a lifetime protecting others may someday need protection ourselves. And whether it happens overnight or over time, it’s a hard role to accept. Learn additional ideas to assist you and your family in preventing financial Elder Abuse from entering your lives here.
- Establish a Trusted Contact Person (TCP). Name a TCP as an extra line of defense for your investment accounts. If your account custodian feels you are being financially exploited, they then have a back-up person they can talk to about some of their concerns.
- Declutter your portfolio management. Over time, most families end up with a confusing array of investment accounts across multiple custodians. Where possible, organize your accounts across fewer platforms, so you can better manage your moving parts. This might be easier to do in less turbulent times. You be the judge.
- Unsubscribe from something. You may also have accumulated hordes of e-newsletters through the years. Some may be useful, but many others may merely distract. Pick a few you never read anyway, and unsubscribe (or, if the source is suspicious, mark them as junk).
- Hire a fiduciary advisor. There are so many effective actions you can take to contribute to your total wealth, we’ve barely scratched the surface. None of them are terribly time-consuming in isolation, but it can feel overwhelming to consider them as a whole. Plus, a coordinated effort usually yields the best results.
- Have faith in others and be optimistic. Know you are not on an island. No one is. Others are suffering through the change along with you, both personally, professionally and financially. Rely on your family, close friends and network to solve problems, offer each other help, give and get support and laugh once in a while. In the end, this too will pass.
Be Proactive and be Ready for a Recession
Remember, recessions generally mean an economy will be in the slumps for six months or more. Be proactive by taking care of your personal economy now. You can do this.
Life is uncertain. The market is even more precarious. This means building wealth has no shortcuts. Success requires a solid investment approach, a long-term perspective, and discipline to stay the course. Instead of leaving your financial future to chance, you need to have a plan, even a short-term one to get through the chaos. Our video can get you started on securing your family's financial future.
So, instead of worrying about your future, why not take positive steps to protect it? Set up a Cogent Conversation with us today. We’ll show you how to transform your hard work into durable wealth.
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