Updated: Jul 13
We've officially hit bear market territory and the risk of a recession is increasing by the day. What does this mean for you and your portfolio? Stick around and let's get into it.
Hey welcome to another video from One-Up Financial. I am your host Eric Presogna, CPA and Certified Financial Planner here to help you increase your income, reduce taxes and invest smarter in retirement.
I've received a lot of questions this year regarding the potential for a recession. Some people believe we're already in one while others think it's likely to occur later this year or early next.
I'm not here to opine on when I think the U.S. will enter into a recession because frankly I don't know. And anyone who says they do is fooling themselves and you because:
1. It's impossible to precisely predict the future and
2. The stock market isn't the economy so timing the bottom is tough because the market may have already recovered by the time a recession is officially announced.
A recession is a normal part of a business cycle that occurs once every 3-4 years or so and lasts on average around 15 months: This is a fact based on years and years of historical data.
So I can tell you for absolute certainty that a recession will happen!
But instead of trying to predict when it will occur, I'm going to focus on what it might mean for you when it arrives, and what you can do to help wither the storm.
First, let's quickly define what a recession is:
A recession, as defined by the National Bureau of Economic Research occurs when economic activity substantially declines over a long period of time. The most common measure of economic activity is real GDP, or gross domestic product net of inflation.
For example, the mortgage crisis which led to the Great Recession started in December of 2007 and ended June of 2009. During that time, real GDP in the U.S. declined 5 out of 6 quarters, or 83% of the time.
At the moment, U.S. economic data doesn't suggest that we're currently in a recession, at least by definition.
But let's assume we're in a recession and talk about what that might mean for the markets, economy and your investments:
A decline of 30% or more in the stock market. With the S&P down nearly 20% YTD already, there's a good chance we could see further losses from here. So, be prepared when you go to check your monthly statements
Scary headlines. Just think; if we're not currently in a recession now when there's a war going on in Ukraine, inflation is soaring through the roof, losses are mounting in the stock market and supply chain bottlenecks are effecting everyday Americans, can you imagine what the headlines are going to say when the recession hits?!?
Companies missing earnings estimates. We've already seen major retailers like WalMart and Target come in short of earnings estimates and adjust their forward guidance lower. This is usually the norm during a recession.
High unemployment and high inflation. Inflation is already there, clocking in at over 8%. unemployment is still relatively low, though could start to tick up if/when we enter into a recession.
Then there's bankruptcies, reduced savings rates and consumer spending, increasing consumer debt levels.
Now, most important is what to do prior to and during a recession to reduce the damage to your portfolio as much as possible:
1. Have a plan - it doesn't matter if it's a comprehensive financial plan or simply an investment strategy. Having a plan in place (whether that's conserving cash for 12 months or adding alternative exposure) that's built for tough times like we're experiencing now will help you avoid making costly financial mistakes down the line.
2. Be honest when determining your risk tolerance - too often I've seen investors with 100% stock exposure scurry to cash when their portfolio is down because they can't take the pain. In reality, they never should have been that aggressive to begin with. Balancing risk vs reward isn't easy as most of us want all of one and none of the other. It's best to envision yourself in the worst economic times (i.e. recession) when establishing an investment strategy as this is when we tend to show our true colors.
3. Have cash reserves and income generating investments (especially for those in retirement) - When the market drops 30%, the last thing you want to do is sell investments to fund your lifestyle in retirement. If you think a recession is imminent, be sure you have a healthy emergency fund of at least 6-12 months' of expenses. You should also have a good understanding of the projected cash flow from your investments (i.e. dividends, interest) and when the payouts are expected to hit your account in order to plan for any large, upcoming expenses.
4. Rebalance - this is really just a fancy term for buying low and selling high, isn't it? In a recession, stocks typically fall more than bonds. And if you have both in your portfolio, their weightings may no longer align with your initial objectives. Corrections and recessions are perfect times to rebalance your portfolio to it ensure you're staying on track with your financial goals.
5. Harvest losses - I sometimes feel like a broken record as I mention tax-loss harvesting is almost every one of my videos, but it really is valuable, especially now. Remember, this only works in taxable accounts whereby you sell an investment to realize the loss which can be deducted on your tax return. But be careful with wash sale rules and purchasing a "substantially identical" investment within 30 days. Consult a tax professional before engaging in tax-loss harvesting.
6. Protect against inflation - sectors that are able to pass along rising costs to consumers, TIPS, and Series I bonds are just some ways investors can maintain their purchasing power amidst rising inflation.
7. Tell yourself: This too shall pass - average recession has lasted 15 months (1945 - 2009).
Are you concerned about a recession and worried what it might mean for you and your investments?
Please don't hesitate to give me a call or shoot me an email. I will respond to you personally.
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Thanks again, and we'll see ya in the next one.