With recession looming ominously on the horizon, how worried should you be about your financial world? Is it time to build a “fortress” around your hard-earned savings and investments?
What we do know with certainty is that one would need to try hard not to recognize the effects of inflation, which has reached levels not seen in nearly 40 years. And, as we’ve previously discussed, the cure for inflation (i.e. recession) is not especially fun either. Regardless of whether a recession materializes, here are several tips to consider as you decide upon steps to fortify your personal finances.
Recession is a natural part of the economic cycle
When it comes to recession, many people lose sight of the fact that it is always a question of when-not-if. Why? When growth reaches high levels or lasts for an especially long time, it tends to lull people (and businesses) into a sense of complacency. Typically, this outsized feeling of security manifests itself in increasingly large amounts of money chasing returns from speculative investments, as investors reach further and further for returns. Sound familiar? Even among people who recognize when financial markets have become overheated, too many continue to engage in risky behavior because they believe it will continue unabated.
Eliminate emotion from your financial decisions
Fear of missing out (FOMO) drives many of these same people to insist that they need to wait until they’ve been notified that the party is officially over. Yet, they somehow believe they will have time to get out before it’s too late, even after everyone else has found out, too. This is like leaving a sold out, playoff baseball game after the last out is made—not missing any of the game—but, somehow, thinking you won’t get stuck in traffic.
Recession is short, but inflation persists until it’s stopped
Many people feel the need to see consistent (i.e., constant) growth, but we all know that’s not how investing works. Markets have ups and downs. While we don’t want to get off the rollercoaster abruptly (when it may not be safe to), we don’t need to chain ourselves to it, either. The average recession since World War II has lasted 6-12 months, with a typical market decline of 36% percent. But even once the economy returns to a full recovery over some amount of time, there are always permanent winners and losers among individual stocks, and even among economic sectors. For example, it took nearly 13 years for the Nasdaq stock index to return to its prior peak after a 78% decline during the Dot-com bubble. When it finally did, many firms from the prior peak were no longer in existence.
Prepare for the storm
Different market conditions require a different toolset. The combination of rising interest rates (and possibly recession) is something that investors have not faced in 40 years, which was the last time we saw inflation reach levels this high. In other words, if you are under age 65, similar economic conditions and hardship have not occurred at any point since you reached working age. That’s why it is important to have a plan in place to avoid unrewarded (and commonly misunderstood) risk and take advantage of investment opportunities when they present themselves. While it can be effective to wait for losses to recover, nobody wants to feel like their money has been detained in a way they aren’t able to use or access it for long periods of time. That can be disruptive to important life plans (i.e., buying a home, paying for college, or retiring when you want). Plan ahead.
When we face changing economic conditions, it’s important that we change our approach to best handle what lies ahead. If you would like to fortify your financial life, let’s talk.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.