Jeff Brindley/
The word recession creates a bit of worry for many investors. Most people don’t fully understand what it means and more importantly what it means for their investments and their spending habits.
Philip Chao, founder and CIO of Experiential Wealth in Cabin John, Md. said, “It’s important to remember that there have been 14 recessions in the U.S. since the Great Depression of the 1930s, and each one lasted an average of 11 months.” “Recession is a natural part of an economic cycle,” he said.
We never really know how long a recession is going to last. It could be the average of 11 months or it could be longer or shorter. So when the economy is in a recession it is important to be proactive. It is important to set up a portfolio to match a person’s risk tolerance. Once that is done then there may be a few minor adjustments and possibly rebalancing of the portfolio but wholesale changes are not recommended. This is because it is important for clients to stay the course during a recession. Many times investors create the most harm by getting out of the market after their investments have lost. Then they don’t participate in the recovery which can be devastating to their portfolio.
Chris Tidmore, a senior manager at Vanguard’s Investment Advisory Research Center in Malvern, Pa. used 2020 as an example: By late March of that year, he said, a $1 million portfolio of 60% equities and 40% fixed income securities would’ve lost about 20% of its value because of the pandemic shock. Then the market rebounded. “Converting the portfolio to cash at that time would have cost an investor more than $350,000 over the next eight months, versus the alternative of staying invested,” he said.
Often the most harm comes from making panic moves instead of following a long-term plan, he said. Still, he recommended regularly reassessing risk tolerance while staying on the lookout for new opportunities. “If you can invest when others are forced to sell, you will significantly boost long-term returns,” he said, acknowledging that that’s easier said than done. “Your psyche will want to raise cash to alleviate the pain of paper losses,” he said.
It is important for investors to control those things that they can. That means controlling spending and setting aside extra funds in the bank for those rainy days that are likely to come. Clients can see market volatility during a recession but many times the market recovers before the recession is over. That is because the market can be an indicator as to where the economy is going. So if the market recovers, that is a leading indicator that the economy will follow.
For investors, the fear of losing portfolio value has been one of the biggest stressors. It is important to remember that a drop in the market doesn’t necessarily mean that an investor’s plan is off track. The market goes through normal ups and downs and that is generally accounted for in a financial plan.
Financial plans account for market volatility and high inflation. It’s made to be resilient to various market changes. Investors nervous about the market and their overall plan should contact their advisor and ask to review and even update their plan.
A financial plan should be tweaked and adjusted on a regular basis as an investor’s circumstances change. Not only does the market change on a regular basis but each investor experiences life changes as well.
It’s also vital that clients understand what the word “recession” really means. Many investors still have a false impression that all recessions mean years of high unemployment, shortages, inflation, terrible market returns, running out of money, etc.,”
Definitions may vary, but most economists agree that a recession is simply a prolonged and significant downturn in economic activity. Typically, as in the current state, it’s used after two consecutive quarters of declining GDP. It is a lagging indicator.
Even if the next quarter continues to show negative growth, it’s important to remember that the stock market has had three straight years of solid, double-digit growth.
Here are a few ideas that might be especially relevant in light of a recession.
For instance, clients should maintain “adequate cash reserves,” said Brian Leslie, a director at Edelman in Omaha, Neb. “You need to make sure you’re in a position to weather the storm in the event of an income disruption. You don’t want to be in a position where you’re forced into selling your long-term growth assets at an inopportune time.”
Another good idea is to reinforce the value of diversification.* “Strategic asset allocation has endured for a reason, and advisors can point their clients to historical data to help them stay the course,” said Chris Tidmore, a senior manager at Vanguard’s Investment Advisory Research Center in Malvern, Pa.
Certainly no one can guarantee that history will repeat itself, but historical knowledge can help calm fears.
It is important for investors to know their risk tolerance and incorporate strategies to help guard against challenging market environments and help them prosper when conditions improve. If you aren’t sure about your risk tolerance and how that equates to your investment strategy, then see a financial advisor to get some advice.
Indeed, the upside of a downturn in the market is that it can create opportunities. “One of the worst mistakes is capitulating and creating permanent losses at a time when opportunities begin to present themselves,” said Jeff Wagner, senior partner at LVW Advisors in Pittsford, N.Y. “Use volatility to your advantage.”
Recessions, he said, can be a chance to “shift defensive assets to aggressive assets,” meaning in part that equity downturns are often good entry points.
As always, I recommend seeking out professional advice from a good financial advisor. They will learn about your particular situation, your timeline and your risk tolerance to help you make the right investment decisions particularly during a recession.
* Diversification and asset allocation strategies do not assure profit or protect against loss.
Jeff Brindley is a financial advisor at RWS Financial Group. He contributes his financial column Brindley’s Briefs to Gazeta Dielli every month. You can reach him at 833.797.4636 X137 or via email at Jeff.B@RWSGroup.org.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc. a broker-dealer, Member FINRA/SIPC. Jeffrey Brindley, Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. RWS Financial Group is not affiliated with Cambridge Investment Research.