There’s talk of the R-word, recession. If you listen to all the chatter, you could get your stomach in knots. Is the sky about to fall?
Truth is, the economy is its own beast, unpredictable. But, should you get your financial house in order, just in case the economy huffs and puffs and attempts to blow it down? The experts weigh in.
1.) Try to Stay Calm
“The most important thing investors can do in anticipation of a market downturn is to remain calm. I spoke to a client yesterday who wanted me to liquidate her account, wait until a deal was made with China regarding tariffs and then reinvest her money. Basically, sell low, wait for some news to make the market pop and buy back in higher. Fear will make people do crazy things, so first and foremost remain calm,” says Amit Chopra, managing partner of Forefront Wealth Planning and Asset Management.
2.) Determine Your Financial Needs
Determine if you are planning for a true economic and systemic problem that is going to cause a long-term slowdown in domestic and international economic growth, or is the market simply moving up or down 5-15%, which has become the new norm for volatility, says Chopra. “Let’s not forget August and September of 2015 the S&P was down 8.9%, December 2015–February 2016, the S&P was down a little more than 7.5%, and in February and March of 2018, the S&P was down north of 6.5%. Market volatility is normal, but also the biggest contributor to investors making their biggest mistake – panicking,” says Chopra.
Before doing anything, sit down with your financial advisor. Make sure your portfolio reflects your changing needs and risk comfort level. “For my clients, an economic event causing the markets to fall doesn’t have much impact on them because their plans are designed around maintaining a full year of any distributions they may take in cash or cash equivalents. Having baskets of assets that coincide with the different time frames of your goals is not something you should do if there is the threat of an economic downturn, but from the beginning of your financial life,” says Chopra.
The biggest thing to avoid is investing emotionally. “Do not expect your adviser or yourself to be able to zig and zag and get you in and out of the market. If you or I could do that, we would all be filthy rich, and I would be the greatest financial advisor to ever live. Alas, that is unrealistic and time in the market is the key to building wealth, not the timing of the market,” says Chopra.
Remember that this too shall pass. “Those who have taken a business approach to investing will be best served, and live to experience the inevitable recovery,” says Gerry Frigon, chief investment officer at Taylor Frigon Capital Management.
Make Smart Moves
3.) Reduce Debt
William Seavey, author of Crisis Investing believes a downturn or recession is imminent. People, particularly in his age group, (60s and 70s), should reduce debt to lessen their obligations in leaner times. “Getting a part-time job while hiring is still ‘hot’ makes sense to offset losses in investments and/or increase income. Going to cash with some investments and purchasing staples that can be stored as inflation creeps up makes some sense. Maybe even relocating to a less taxed and expensive state is an option to preserve capital. Bottom line -- cut down on unnecessary expenses and live more frugally until the economy returns to an expansionary mode,” he says.
4.) Diversify Your Investments
Diversify. There are many types of investments out there and each acts differently. For example, when stocks go up in value, theory suggests that bonds may go down in value or not go up quite as much. “Furthermore, during the great recession of 2008-09, everything was bad. From real estate to stocks to bonds there wasn't much that did well during this time. However, gold and other commodities were an exception. So, diversifying your portfolio among a broad spectrum of varying asset types, classes, and styles can be helpful in minimizing the effects of a market downturn,” says Brent Dickerson, a certified financial planner and owner of Over Coffee Financial.
If you already have a diversified portfolio, then do nothing. “Well, not exactly nothing, but don't make changes based on day-to-day movements of the market or particular industries or stocks. Monitor your portfolio but try to limit your involvement in it. One of the worst things anyone can do is to trade a lot. Trading triggers transaction fees, taxable events (unless in a tax-qualified account like an IRA,) and you're making the assumption that you are exiting a particular investment in favor of a better investment at that particular point in time. How are you to know if that was the right choice in 6 months? Trying to predict the market is like trying to pick the winning Powerball numbers. That's why the best course of action is to set a well-diversified portfolio from the start and make as few changes as possible,” says Dickerson.
5.) Be Proactive
Samuel Zhou, a financial blogger with Creditcardio.net, says the economy has been overheated for a while and everyone should prepare for an eventual recession. What does he recommend? “Have an emergency fund that can sustain you and your family for up to 3 months, ideally for a year if possible. Complete any home or car maintenance repairs/fixes before they become a big issue and if possible, look for or stay in a job that can weather a recession.”
6.) Think Twice About Big Purchases
Zhou says not to make a big purchase even though you currently have a job, similarly, think twice about financing a big purchase. The less debt you have the better. Dave Ramsey, author of Financial Peace, puts things in perspective, “Remember, your economy is up to you. If you’re out of debt and have money in the bank, then the chicken littles running around yelling that the sky is falling can yell all they want. When you have a plan, live on less than you make and save money, you are not in trouble.”