The “R-Word” seems to be getting an awful lot of air-time these days. From the debt ceiling discussions to inflation to jobs reports, it’s on the tip of everyone’s tongue, especially the media.
Here’s the thing, though, no one knows what will happen; not all recessions are bad things, and not all recessions mean the market is going to be terrible.
There have been 11 recessions since 1948, averaging out to about one recession every six years.(1) However, periods of economic expansion are varied and have lasted as little as one year or as long as a decade. The average recession before 2007 lasted about 11 months, while The Great Recession lasted 18 months.(2) The 2020 recession lasted just two months—the shortest on record.(3) Part of the problem is that when people hear the “R-Word,” they immediately assume it also means the “D-Word,” Depression. It doesn’t. An economic depression lasts longer than a recession, and it causes greater damage to an economy. The Great Depression ravaged the economy over a matter of years, while recessions are typically measured in months.
While all the concerns about recession are valid, recessions, like everything in life, are not black and white. Let’s face it, much of the current state of affairs was inevitable. Easy monetary policy from the Fed combined with a flood of money pumped into consumers' pockets from multiple pandemic stimulus packages created a period of unsustainable growth, and here we are. That being said, there are many different types of recessions, and a recession doesn’t always mean long-term negative returns. We’ve been here before; in fact, historically, stocks have performed well in recessions more often than not, as the chart below shows.
That’s right, I said it! No need for Chicken Little to make an appearance; the sky may not be falling. And even if it is, guess what? You can be prepared! You don’t need to run around the barnyard freaking out. Instead, you can do a few things to recession-proof your barn, I mean finances.
In fact, we have already done quite a bit to recession-proof your finances. Now, that doesn’t mean that you won’t be affected; there are no guarantees in life, as we all know too well. However, it’s best to be prepared. And as many of you know, one of my favorite quotes comes from the wise and “monk-like” Mike Tyson; just kidding. But he still did say, “Everyone has a plan until they get punched in the mouth.” I say, maybe we can avoid the punch and keep our teeth! At the very least, it’s worth the effort.
So, what have we done already to prepare your finances? Plenty of things! For starters, every one of my clients knows the exact number they need to retire. They also have a date and dollar-specific plan that is based on a personalized and customized investment plan that includes both thoughtful and intentional asset allocation and diversification and is regularly rebalanced. My clients are also well-coached to stay out of their own way, they realize that volatility is an illusion, and they practice the investment principles of faith, patience, and discipline.
That’s a lot of preparation you may not have realized you’ve done! But you can do a few more things, too, and that is exactly what I will share with you this month. We will look at things like:
- Having an emergency fund,
- Living within your means,
- Creating multiple income streams,
- Reinforcing your long-term approach to investing,
- Being honest about your risk tolerance, and
- Keeping your credit score high.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
1Federal Reserve Economic Data. "Unemployment Rate and Consumer Price Index."
2International Monetary Fund. "Recession: When Bad Times Prevail."
3National Bureau of Economic Research. "Business Cycle Dating Committee Announcement July 19, 2021."
4 Hartford Funds. “10 Things You Should Know About Recessions.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.