Is a recession coming? Apparently, many think it is just by the number of people seeking information on it. Google the term “recession 2020”, and you’ll come up with well over 75 million results.
That concern is hardly without merit. In What Could Cause A Recession In 2020, Forbes contributor, Bill Conerly, cited the following potential drivers:
· Continuing trade issues with China
· Economic deceleration in China and Europe
· Flat global industrial production
· Potential for tighter monetary policy by the Federal Reserve
· Oil price hikes
· High personal debt levels
And in case you’re thinking concerns over the next recession are overblown, we’ve had 33 recessions in the US going back to 1854, including 12 just since 1945. The typical recession lasts only about 11 months, at least in the recessions that have taken place since World War II.
But what if, like in 2008, we have another recession that’s worse than average – even one for the record books?
Facing a Recession with the Right Attitude
There are a couple of things we all need to keep in mind at the onset of a recession.
Take a deep breath! When recessions hit, people are all about doom and gloom – your portfolio is going to take a hit, you’re going to lose money, your job may be in jeopardy.
The media exploit those concerns. They know that fear sells. As soon as you read or hear that a disaster is coming, you’ll want more information. The media will be saturated with more stories of doom and gloom to feed into your insecurities. You can absolutely bet on it.
But that’s exactly what you need to avoid. Instead, develop a plan to move forward, no matter what’s happening in the economy.
“Too much time is spent thinking of fear for the next recession,” cautions Tom Diem of Diem Wealth Management in Fort Wayne, Indiana. “Instead, think abundance. This is when you want to move up in your career, particularly if you are in a management position. By the time fear is at its highest, you will have your resume out there and have made positive contacts with at least several new hiring managers.”
It’s all about the long-term. Here I’m mainly focusing on the investment implications of a recession. Investing is all about taking the long-term view. We need to do that in recessions, the same way we do in bull markets.
Warren Buffett summed it up best: “If you are thinking about owning a stock for 10 years, that you shouldn’t think about it for 10 minutes.”
Recessions are going to happen, and they’re short-term in nature. They shouldn’t have an affect on your long-term game plan.
“The best way to prepare for a recession is the same way you prepare for a roaring bull market, or any other economic or market scenario,” suggests Russ Thornton, an Atlanta-based fee-only financial advisor focused on providing retirement planning for women. “You should have a personal financial plan and you stick with it. Sure, you might have to make some adjustments to your plan as your life unfolds and presents you with some decisions that need to be made. But those adjustments will largely be due to changes in your life circumstances. Neither your financial plan, nor your financial decisions, should be driven by current events – whether recession or otherwise.”
Strategies to Prepare to Survive and Thrive in the Next Recession
Recessions are going to happen, and there is nothing any of us can do about it. But the critical take away is that we need to be prepared. Is it possible to recession-proof your career and finances? And if so, how can you do that?
1. Pay Off All Debt
Debt is a problem even when the economy is booming. But it’s an even bigger problem during recessions, when you may be facing the possibility of losing your job or experiencing a serious decline in the value of your investments.
Whether credit cards, student loans, medical debts, or any other type of financing, the more you can eliminate, the fewer payments you’ll have. That will make the loss of your job that much easier to deal with, especially if you’re unemployed for several months.
If you can’t pay off all your debts, pay off or pay down as many as you can. The more you can pay, the stronger your financial position will be if your personal financial situation starts to look shaky.
2. Cash is King
There are two primary reasons to stock up on cash in advance of a recession, and they’re equally important.
The first is preparing for emergencies. Emergencies can happen in expanding economies, but they tend to be more frequent in recessions. Having a well-stocked emergency fund is the best way to prepare in advance. It’s one of the best strategies for preventing small financial problems returning to the big ones.
This is a serious problem in America. A survey done by GoBankingRates late in 2019 found that 69% of Americans have less than $1,000 in savings. That includes 45% who report having no savings that all. If you have little or no cash, even small unexpected expenses can turn into financial disasters.
The problem extends to retirement savings as well. A study done by Northwestern Mutual revealed that 22% Americans have less than $5,000 saved for retirement, while 15% have no retirement savings at all. That’s 37% of the adult population.
If you’ve never been able to accumulate much cash in the past, there are several ways to make it happen. Stop buying stuff. Start selling stuff you don’t need. Cancel any subscriptions or services you don’t need. And make sure you redirect the savings from all those efforts into loading up your emergency fund.
The second reason the stock up on cash has to do with the next recession strategy…
3. Keep Investing
When the financial markets get shaky, people panic. When I used to work with people in my financial planning practice, I’d see and hear many wanting to sell everything and move into cash. That’s the absolute worst strategy, and I spent a lot of time walking people off that ledge.
It’s understandable to want to go to cash if you’re retired. But if you’re still working, and contributing to your 401(k) plan, you need to keep investing for the long-term.
“A person’s workplace retirement account is most likely their largest asset for retirement,” says Matthew Jackson, President of Fort Collins, Colorado-based Solid Wealth Advisors, LLC, and #1 Best-Selling Author of “The Retirement Dreammaker“. “Getting regular help rebalancing a workplace retirement account’s asset allocation based on current market conditions and individual tolerance to risk is important. There is no such thing as a one-size-fits-all investment strategy. Also, beware of target date funds. Their asset allocations may simply be based on a person’s age rather than current market conditions and individual tolerances to risk.”
This also gets back to the cash is king concept. If you’ve been stocking up on cash, you’ll have the funds available to buy into the market. That’s more important in recessions than ever, because you can buy stocks at depressed prices.
“The investment strategy that works best in a recession is to have little to no consumer debt, own cash, and have the guts to buy at the bottom of the dip,” advises Anthony Montenegro, founder of The Blackmont Group and creator of 401kwealthguide.com. “Economists aplenty have opined that a recession is coming in the next 18 months or so. The truth is a recession is always coming. The bottom line is that you will want to have made changes to your investment portfolio prior to the decline.”
The facts support that strategy. Going back to 1926, the average stock market loss during bear markets – which generally correspond to recessions – has been 38%, over an average of 1.3 years. But the bull markets coming out of those bear markets have produced average cumulative returns of 339%, over 6.6 years. That’s a surge you don’t want to miss due to a short-term market decline.
For example, after the S&P 500 lost 36% in 2008, it gained 26% in 2009. It is not possible to time the market, but if you were investing through the 2008 downturn, you would have been well-positioned to take advantage of big gains in 2009, and the years that followed.
In hindsight – which admittedly, no one had in 2008 – it was the best year to buy stocks in decades.
4. Building Your “IA’s” – Intellectual Assets
This is all about improving your skills and qualifications. If a recession is coming, one of the very best strategies to keep yourself relevant on the career front is to improve your abilities. That might mean getting an advanced degree. But it can also mean taking online courses or getting an important certification – anything that could help your career move forward.
In a nutshell, you’ll be doing whatever it takes to improve your value in the job market.
In the process, you may be preparing for a new job, or even a whole new career. Either way, preparing in advance is the best way to avoid being blindsided by a job loss during a recession.
5. Create a Side Hustle
“Side hustle” is a popular term, but I prefer to think of it as a side business. Under the best scenario, it’s the type of business that will be earning you additional income while you’re doing other things – like working at your regular job.
It could be an online or off-line business, but it’s something you’ll create as a way to generate extra income and diversify your income sources.
It may be that at the beginning you’re only making a couple hundred dollars per month. But as you roll forward, you’ll eventually get up to $1,000 per month. If you lose your job, your side hustle will be an important additional revenue stream. It will supplement other sources, like severance pay or unemployment benefits.
But if you can build a side hustle to the point where you’re earning at least $1,000 per month while you still hold your full-time job, the loss of that job may give you the extra time you need to turn that side hustle in the something bigger. It could possibly even become your next primary occupation.
If a recession is coming, this is absolutely not the time to panic. Instead, focus your time, effort, and energy on doing what’s needed to thrive even if the economy does head south.
In the end, the next recession will only be temporary. You can decide now to take steps to position yourself to prosper when it ends.
If you look at what’s happened with the stock market since the last crash in 2008, it’s obvious the steps you take to prepare now will produce a big payoff later. Ignore the headlines, and make your plans!