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Five Ways to Prepare for a Recession

It’s been more than a decade since the United States experienced a recession. The so-called “Great Recession” started in 2007 and ended in 2009, lasting approximately 18 months. During that time, many people lost their jobs, their homes, and even their entire savings. While the U.S. has experienced a number of recessions over the years, the Great Recession has been considered the worst since the Great Depression, which started with a stock market crash in 1929.

What exactly constitutes a recession, and how can you be prepared if one occurs? That’s a question we often get from our clients at AMDG Financial. We get it – most people don’t want to experience another painful or lengthy downturn. Yet, according to the National Bureau of Economic Research (NBER), the official arbiter of recessions in the U.S., there have been more than 30 recessions since the 1850s. Historically, experts have defined a recession as two consecutive quarters of decline in the Gross Domestic Product (GDP), which is the combined value of all the goods and services produced in the U.S. NBER, however, defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

The idea of a recession has been on people’s minds a lot recently, as some indicators, like the inversion of the yield curve, have flashed warning signs. In fact, Google searches for the word “recession” skyrocketed in August! But at this point, many of the usual indicators don’t point toward recession in a clear-cut way. While global growth is slowing, unemployment numbers remain very low. The University of Michigan’s consumer-sentiment index climbed to 92 at the beginning of this month, up from 89.8 in August, while the Fed cut interest rates for the first time since 2008 in July to try to spur an increase in borrowing.

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Will we have another recession? I believe it’s not a matter of if, but of when. Recessions are a normal part of market activity, and many have tended to be short in duration, lasting less than a year, with the exception of the Great Recession. How can you be prepared? Here are five ideas:

Make sure you have access to cash. While everyone should keep an emergency fund, you may find that you need additional cash during a recession. Rather than amassing a large cash cushion, determine where you can access additional money if you need it. It could be from a savings or a brokerage account. Everybody’s needs are different, and the amount you need depends on your personal situation.

 Don’t rack up credit card debt., but do consider a home equity line of credit for emergencies. Of course, it’s never a good idea to take on credit card debt, but it’s especially helpful not to carry extra debt in a recession. Missing a payment or paying the minimum means you’re just escalating your debt – something you don’t need when the risk of job loss or reduced income is high. If you need to repair or remodel your home, consider taking out a home equity line of credit, or HELOC. Chances are the interest rate will be lower, and you don’t need to use the line except in an emergency. If you use the money to remodel, repair or improve the value of your home, the money is tax-deductible.

 Stay diversified. A recent blog by Dimensional Fund Advisors looks at some of the lessons learned over the past two decades. The blog shows that from January of 2000 to December of 2009, the S&P 500 delivered less-than-average annualized returns of -.95% com, compared to more than 10% annualized returns on average prior to 2000. Those who diversified globally during the same period, however, achieved much better returns.

Take a long-term view. If you don’t plan to retire for another 10-30 years and you have an investment plan in place, now is not the time to make a change. While it may be difficult to ignore the headlines, remember that the market will likely fluctuate, and recessions may occur several more times before you need the money. Instead, focus on your long-term goals and stick to your plan. Timing the market doesn’t work, but the evidence shows that a disciplined approach does.

Check in with your adviser. If you are nearing, or are in retirement, and haven’t adjusted your portfolio allocation for a while, meet with your adviser to discuss whether your current level of risk is appropriate for your situation. If you are 100% invested in stocks, for example, moving a percentage of your portfolio to bonds can offset the high level of risk that a stock-only portfolio contains. Because every situation is unique, there’s no “perfect” ratio of stocks to bonds that fits every investor, but your adviser can help you determine whether an allocation adjustment is necessary, and what the best ratio is for you.  

Patience and discipline are your keys to success when it comes to your investment strategy. Remember that between recessions, both the economy and the stock market have historically continued to grow. While we can’t predict the future, we know that volatility is the norm, for at least the near term. Instead of reacting emotionally to the possibility of a recession, understand that recessions come and go. How you react to a recession can mean the difference between feeling short-term relief, or long-term financial well-being.

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