How To: Prepare For The Next Recession
Updated: Apr 4, 2020
There has been a lot of chatter about “the next recession” as of late. And by late, I mean nearly the last decade. The very fact that it has been a topic of conversation for so long portends the fact that we can’t accurately predict when they’re going to happen. However, given that we are close to being in the longest economic expansion in our history, it seems reasonable to believe that a recession is coming sooner rather than later. So, here are some things we can do to prepare for its inevitable (but unpredictable) arrival.
Let’s start by pointing out the things we cannot control.
When the recession will occur.
How severe and / or long it will be.
How our portfolios will be affected.
How our homes value with be affected.
How our employment will be affected.
So, what can we control?
1) How much risk you’re taking in your portfolio.
This needs to be rather consistent, regardless of when you think or feel the next recession or market decline is coming. The returns you’re going to experience, and the accompanying risk (volatility) is controlled predominantly by your mix of stocks versus bonds, and whether those are of the United States, or abroad.
Taking too much risk because you think we’re in the clear could backfire tremendously if that winds up not being the case. Conversely, taking too little risk because you think we’re “due for a recession” could also backfire tremendously by missing out on gains if that ends up not being the case.
Your portfolio needs to be a blend of 1) an investment mix that is likely to generate the return you need to achieve the goals you want and 2) a balance of risk and return that you can comfortably and consistently stomach through thick and thin.
This applies to the investments within your 401k, as well.
Lastly, if you receive stock options through your employment, now is also a good time to check on how much money you have invested in your own company’s stock. If your company is going to land on hard times, the last thing you want is to also lose a chunk of your savings if the company stock falls, while at the same time facing a pay cut or worse.
2) How much you spend.
When was the last time you took an inventory of your monthly expenses and trimmed unnecessary ones?
The leaner you can run your household, the more you can put towards eliminating debt, building your investment portfolio, and saving for your life fund, all of which can go a long way towards increasing your peace of mind.
3) Your life fund.
Having 3 to 6 months worth of your essential living expenses (mortgage, utilities, insurance, groceries, etc.) stashed away in cash is a great way to mitigate the risk of an unforeseen expense, losing a job, or a decrease of income.
4) The debt you carry.
The good times never last forever, so while they’re here, it’s probably a good time to reduce your debt, especially high-interest credit card debt. Not having to make those payments if times get tough will make life a lot easier.
5) Your insurance coverages.
Sometimes, when it rains, it pours. Having proper insurance in place is a great way to keep your life from turning into a country song. Ensure that your life, disability, home and auto insurances are all appropriate for you. These are all very personal, so reach out if you have any questions and we’ll review what you have to ensure you’re in good shape.
Pull it all together.
This can feel daunting, but that's what I'm here for. Call me any time with questions. Also, the Financial Dashboard available to all of our clients is a great way to get all of the above organized. Get started here or give us a call and I'll gladly set it up for you.