Welcome back, folks! This week, we are going to talk about two more ways to recession-proof your finances by creating multiple income streams and reinforcing your long-term approach to investing.
Creating Multiple Income Streams
Even if you have a great full-time job or are retired, it’s not a bad idea to have a source of extra income on the side, whether it’s some consulting work or selling collectibles on eBay. With job security so nonexistent these days, more jobs mean more job security. Diversifying your streams of income is at least as important as diversifying your investments.
Once a recession hits, if you lose one stream of income, at least you still have the other one. You may not be making as much money as you were before, but every little bit helps. You may even come out the other end of the recession with a growing new business as the economy turns up. Plus, it may give you the chance to do something you love that you wouldn’t have risked doing before!
Reinforcing Your Long-Term Approach to Investing
Perhaps even more important than creating multiple income streams is making sure you continue to have a strong commitment to long-term investing. As you know, everything, especially market turbulence, is temporary. So what if a drop in the market brings your investments down 15%? If you don’t sell, you won’t lose anything. The market is cyclical, and in the long run, you’ll have plenty of opportunities to sell high. In fact, if you buy when the market’s down, you might thank yourself later.
That being said, as you near retirement age, you should make sure that you have enough money in liquid, low-risk investments to retire on time and give the stock portion of your portfolio time to recover. Remember, you don’t need all of your retirement money at age 66—just a portion of it.(2) It might be a bear market when you’re 66, but it could be a bull market by the time you’re 70.
So what is volatility? It’s an illusion. The Merriam-Webster dictionary defines illusion as “something that deceives or misleads intellectually.” Illusions take advantage of our natural reactions by making us see things that don’t exist. For example, take a look at the chart below. It shows annual returns and intra-year declines from 1980 to June 30, 2022.
What is the first thing you notice, just a gut reaction off the top of your head? That’s right - since 1980, there have been seven years we ended down for the year in the S&P 500. Those are the long gray bars. The market ended down for the year ten times since 1980.
What about all those little numbers and red dots? Well, those are your intra-year declines - in other words, how many times the market closed down within each year in the same timeframe. What do you notice about that?
There are a bunch of red dots for sure, yes, BUT, those little red dots didn’t cause all of those years to end negatively for the S&P 500. Again - the index closed down in just ten of the 42 years shown…one more time to reinforce my point, down for just ten out of 42 years! That’s a big deal!
So let me ask the question again but in a different way. Does volatility exist? Yes, BUT…Volatility is not risk. There are many different types of risk, but volatility is a normal occurrence and very much needed to maintain market health. And perhaps even more importantly, volatility does not mean recession. That means the moral of the story is STAY INVESTED!
One more question for you. Can you make money in the market if you are not in the market? The simple and obvious answer is no. Time in the market is always a good thing because every down has an up, and no one wants to miss out on those.
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.
1 Investopedia. 7 Ways to Recession-Proof Your Life.
2 U.S. Social Security Administration. “Retirement Benefits,” Page 2 (Page 6 of PDF).
3FactSet, Standard and Poor’s, J.P. Morgan Chase Asset Management.
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.