We’ve seen no shortage of recessions in our country’s history. It’s the nature of economies to expand and contract, and sometimes those contractions can last a little longer than we’d like. While NBER hasn’t officially declared a recession as of now, by the traditional definition of two consecutive quarters of a slowing economy, we’re in one.
What does that mean for your financial plan?
Chances are you last met with your financial advisor during a period of high growth. In fact, with the exception of 2020, we are coming out of an entire decade of it. And your financial plan likely reflects that.
But we are now facing a period of decline and challenging markets. Our financial planning wizard and managing partner, Gloria, believes that as we have experienced a longer than normal bull run, among other global factors, the recession may last longer than typical.
It’s wise to prepare.
Have you thought about how your rate of return on investments will change during down markets? Or about how that will affect your long-term goals and retirement strategy?
And if you’re one of the people who haven’t yet met with a financial planner, there’s no time like the present.
Without a plan, you’re positioning yourself to take worse hits during tough economic times.
With a plan you make with your financial advisor, you can take advantage of expansions, contractions, and everything in between.
We’ve written in the past on how to manage your money during a contraction and how to prepare for a recession as a business owner. But today, we’re going to focus on your overall financial plan.
Recession-proofing your financial plan
Financial plans aren’t meant to be set in stone. The economy is constantly changing. And if it isn’t static, your plan can’t be either.
Think of financial planning as a process rather than a destination. It has to be responsive to the changing, unpredictable conditions of your life, the economy, and the world.
You have to:
- Make a plan.
- Work your plan.
- Adjust your plan.
Analogy time! Imagine a sea captain crossing an ocean on a clipper. They wouldn’t aim their vessel toward their destination from the harbor, lock the helm in place, and call it a day. The likelihood of reaching their destination would be slim.
Any sailor has a changing ocean to contend with, shifting winds, currents in the water, waves, storms to avoid or push through.
Let’s just say, not adjusting course in a changing environment, whether it’s the ocean or the economy, can have unwanted or devastating consequences.
So, sailor, here are four things to consider about your financial plan as we enter the economic doldrums.
1. Ensure discretionary money is being invested appropriately
We know… you hear the words “recession” and “bear market,” and you think, that’s it, I’m pulling all my money out of investments and hiding it in my mattress.
But this couldn’t be farther from what you should do.
There are opportunities to be had in any economic climate, just as there are hazards to avoid.
At NEST, we are strong believers that you can benefit from any economic situation, if you’re smart about it.
How do we do it?
Well, during a boom, it’s fairly easy. Equities and bonds are usually where it’s at, and it’s really not difficult to make excellent returns during a bull market. In fact, many novices have been fooled into thinking themselves prodigy investors during times of explosive growth.
It’s when things slowdown that an investment manager really shows their skill. The keys to that are: using good data sources, the ability to interpret that data, and an in-depth understanding of which asset classes shine in each economic environment.
Sean, NEST’s investment manager, uses the Quad system and reliable, raw, and unbiased data, which he spends hours each day reviewing to constantly tweak our portfolios.
By doing this, he not only keeps NESTers’ money out of harm’s way, but he also keeps it ready for any opportunity that arises.
So, while it’s tempting to deprioritize investing during a downturn, it’s a mistake. What goes down will come up again, and if you’re not investing appropriately, you’re likely to miss the ride up.
2. Prepare yourself
Typically, your emergency fund should cover at least three months of living expenses. That will give you at least a small buffer if your financial situation should change for the worse.
But, as we head into a recession and a period of extended market decline, it’s smart to expand that buffer if you can.
Lay-offs are synonymous with recessions, so be prepared to cover your necessities should you find yourself holding the proverbial pink slip. If you can take that three months up to six, that doubles your ability to support yourself and your family without taking on debt, and it gives you that much more peace of mind. Both vital when on the hunt for new employment.
Another aspect of the preparedness mentality is to put off unnecessary large expenditures and cinch up your belt. This can create the extra funds in your budget to start padding that emergency fund and prepare your cash flow habits for leaner times, if they come.
For more on how to manage cash flow, check out this post on managing money during a recession.
3. Understand what rate of return you need to meet your goals
First, you have to set your goals — when you want to retire and at what age, how much you’ll need to live each year, paying for your kids’ college, helping them with a home down payment. Whatever they are, you’ve got to have goals.
A goal is like a map. You can always change your route or even your destination but having a set goal tells you which way to go.
So, what do we mean by rate of return?
Well, let’s say you want to get to Amarillo from Austin. You’ve got to consider when you need to arrive, the mode of transportation, the cost of gas, and any detours along the way. Then you can calculate when you’ll need to leave and how fast you’ll need to go.
The same is true for your financial plan’s goals. When you factor in the amount of money you have to save and invest, the amount of time you have before you’d like to reach your goal, and how much money you’ll need to reach it, what’s left is the rate of return you’ll need to get you there.
If you have lots of money to invest and lots of time, you might not need such a high rate of return. This would allow you to be more conservative (i.e. less risky) in your investments. However, if the opposite is true, you might have to be more aggressive and accept a higher level of risk, or else adjust your goals.
How does this relate to a recession?
The economy is the elephant in the room. Sometimes the markets just can’t support the rate of return you calculated for your goals during a boom. If you calculated needing a 10% return to meet your goals, during a recession, it might not be possible.
That means that you’ll have to adjust one of the other factors:
- The time you’d like to reach your goal
- The amount you’re saving or investing
- The goal itself
If you’re unsure if your current rate of return is viable for helping you reach your goals, it’s time to schedule a meeting with your financial advisor.
4. Revisit your financial plans now
Sure, you could wait a while before reaching out to your financial advisor. See what happens. Hold course. Roll with the route you’ve already planned out.
But if you can already feel the raindrops of the approaching storm, it might be time to change course, or at least check if your current plan will get you to where you’re going given the current conditions.
Acting sooner rather than procrastinating can help you not only benefit from opportunities you didn’t lose, like buying low, but also help you avoid costly mistakes, like staying in equities as the stock market plummets.
Even if it isn’t “official” yet, we’re in a recession. Don’t wait until you’re so lost you can’t tell east from west — check your map now.
If you’re ready to get serious about your goals, recession be damned, why not schedule a no-obligation call with Gloria or Dan? At NEST, we have nearly 30 years of experience with financial planning and investment management. Let us use our expertise to guide you through the ocean of financial planning and wealth management toward the shores of financial independence. Reach out at info@nestfinancial.net.
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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.
