The last official recession in the United States ended in 2009. Regardless of age, we all remember it. Whether you call it “The Financial Crisis” or “The Great Recession,” it has left an indelible mark on how we view our economy of the last decade. For many, it has scarred how we think about the world of economics and finance, leaving many of us wondering when the next shoe will drop.
However, the current economy and the financial markets of the last ten years paint a different story. Unemployment is as low as it has been since the Mets won their first World Series 50 years ago. The S&P 500 and NASDAQ hit a new high at the end of April. Interest rate hikes have, for the time being, stopped and the Fed is signaling a bias toward cutting rates rather than hiking in the future.
That said, worries exist. Tariffs levied against China and Mexico, an inverted yield curve, and lagging smallcap and value stocks have many investors and professionals concerned about an impending recession. The 15% pullback in November and December was scary. And the upcoming election cycle could lead the market to take interesting turns depending on how the process goes over the next 18 months.
With all that as a backdrop, I have the following to say:
A recession will happen. I don’t know when it will happen. A significant bear market or market crash will happen. I don’t know when it will happen.
The question that comes out of it is: How are you prepared for the coming downturn and how will you react when it does?
Preparation is key. You can start today. Here’s how:
Make sure you have adequate cash reserves.
When people think of recession, they think of job losses. This means having spending with limited to no income. It is considered good practice to have six months of expenses in cash as a reserve/emergency fund. Having cash to draw from for your spending means that you don’t have to touch long-term investments while searching for your next job or career. Touching long-term investments can be extremely costly, especially if they are in tax-deferred retirement accounts given the taxes and penalties put on withdrawals.
Understand your budget.
If you don’t know how much you are spending now to live, how will you know what you can manage when times are difficult? Ubers, Seamless, bars--where do you spend more than you thought? Consider where you can cut some expenses now so that you won’t have to drastically cut your lifestyle later.
Check how your accounts are invested.
If you haven’t done it in a while, now is the best time to check your asset allocations in your 401k, IRAs, and taxable investment accounts. As asset prices are near their peak, your asset allocation may be riskier than you had planned. What better time to bring your accounts to your target allocation? Lock in some gains now and you will be ready to add risk should markets fall before your next rebalance.
Keep contributing to your Roth IRA.
Tax-free growth in these accounts is a great way for younger and lower-income savers to grow assets. In addition, your Roth IRA could be a place to tap some assets in an emergency. While it’s always appropriate to have adequate cash reserves, Roth IRAs may allow you to take out your contributions without penalty in case of emergency. This should be a last resort, however.
Be Ready For Opportunities.
In a recession, new opportunities always pop up, whether from applying your skills in new industries, the chance to start a new business, or lower asset prices. Don’t be afraid to take them.
The next recession is coming. Be ready to manage the stresses, changes, and opportunities that it will bring. If you need help with your preparation, you can set a consultation appointment here.
Russell D. Rivera, CFA, CFP® is the Founder and President of Voice Wealth Management (Voice) in New York, NY. He also likes to think of himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences.
Indices mentioned are unmanaged and cannot be invested into directly. Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.