Today, I’m going to talk about a topic that most financial folks avoid like the plague.
Yes, we are going to talk about the “R” word: Recession.
I know I know, just hearing that word makes the muscles in your back tense up and a cold bead of sweat drip down your spine. Immediately, you begin to have flashbacks to 2008 and that song by The Script starts to play in your head.
Oh these times are hard. They’re making us crazy. Don’t give up on me baby.
You begin to think about a recession, and you begin to think the worst. You imagine losing your job, your home, and all of your savings.
But before you give in to the anxiety of what if, take a deep breath. You see, a recession doesn’t always mean a 38% drawdown in the stock market. It doesn’t always mean you are going to lose half of everything.
In fact – and I know this is hard to hear over the echoes of The Script right now – a recession is an indication of a healthy, cyclical economy. The S&P 500 on average has a 10% correction every 2 years, a 20% decline (bear market) every 7 years and a crash of 30%+ every 12 years.*
So with all of this in mind, now might not be the time to sell off your portfolio. Now is the time for prudence and preparation. Here are five things to consider.
- Reassess Your Budget. It is always a good idea to examine your budget at least every six months. When you have a salary coming in, pivoting more to into savings is a good idea. Take a look at your emergency fund and make sure that you have six to nine months of expenses in the bank. This will give you a cushion, and a little piece of mind, no matter what lies ahead. As summer arrives, I know it is easy to lose focus, but a little prudence can go a long way.
- Put the big purchases on hold. Maybe you’ve been eyeing that new Tesla or a new car. Maybe you’ve been considering a big renovation project or a beach house. Now may not be the time to take on another bill. Take that down payment and put it into your emergency fund for now.
- Credit cards and debt. Credit cards also require a lot of prudence. Please know, I am not telling you to cut up your credit cards. Credit cards are a great tool if you use it and pay it off each month. But, if you rack up $60,000 in debt at a hefty interest rate, things can get out of hand quickly. Even during a recession, continue to paydown your debt, including your student loans. Long term, it is easier to get out of a hole by never getting into a hole in the first place.
- Avoid the portfolio sell off. We all have that friend who liquidated his 401(k) in 2008. We heard the jokes about a 201(k). But now might not be the time to liquidate. When you sell at a market low point, you are locking in at that loss. Now is a good time to take a moment and look for the opportunities.
- Don’t Panic. This is a time when people make bad decisions. The best solution is to avoid the hysteria. Avoid the hyperbolic headlines. This is a good time to be greedy when other people are fearful.
Still anxious? Let’s set up some time to talk. The best way to get through a rough and rocky market cycle is to turn off the noise and talk to someone.
*https://awealthofcommonsense.com/2022/01/how-often-should-you-expect-a-stock-market-correction/