Four Tips to Weather a Recession

Born in Colorado, I love the distinct change of seasons.  I have even come to embrace that we may experience all of them in one day!  We also have economic seasons and life seasons that we can gain a deeper understanding and appreciation of.

Economic season terms include early expansion, late expansion, early contraction and late contraction.  We also hear of innovation, expansion, recession and depression.  We experience distinct seasons in the economy.

Life seasons are more familiarThe trajectory of life from birth to death is linear individually, but collectively, life seasons are perineal.   Birth, growth, decline and decay.  It may be less comfortable to look at the fall or winter season of life, but it is all natural.  Whether economic or life, let’s prepare for what happens, have reasonable hopes and expectations about what can transpire, and embrace the beautiful essence that unfolds in each.

When the nights get longer, the days cooler, the leaves take on a slight hint of yellow, we acknowledge Fall is coming.  Why, when we hear “recession”, do many panic?  It is a normal and anticipated economic season.  As an economic summer (expansion) ages, asset values rise and debt loads increase.  At some point, this environment shifts.  It is a complex, multi-faceted phenomena that will push us into a recession.  Will it be shallow or deep?  How long will it last?  A shallow recession is where the economy contracts or pulls back marginally (around 20%) for a shorter period.  The Great Recession of 2007 – 09 almost pushed us to a financial winter/depression.  According to the National Bureau of Economic Research (NBER) from 1945 to 2009, the average recession lasted 11 months.

Be Aware and Prepare.

Cash on the sidelines.  Job losses, fewer raises and stock price declines are part of the recessionary landscape.  Liquidity on the side for cash flow will provide you with peace of mind to get through.  Retirees don’t want to take money out of your investments when they are down in price.  This exposes you to “sequence risk” – the danger that bad timing of investment withdrawals will negatively impact the longevity of your resources. Take cash flow from savings to supplement fixed income sources such as social security or pensions.   Cash on the sidelines also allows you to buy on the dips.  Like going to the store and finding what you want on sale.

Revisit your Intentional Spending Plan.  Do your spending choices align with what is important to you?  What are your fixed expenses and what are variable?  Inflation has impacted everyone and when things cost more and you have less to spend, it wears on you. Make it a priority to not carry a credit card balance.  Where can you be creative, agile, resourceful, adaptable with your financial choices in how you bring money into your life or how you choose to use it?

Assess your portfolio –  It is a good practice to rebalance your portfolio, ideally at market peaks where you can take gain off the table and look at market sectors that have potential or provide safety.  In recessionary periods, it requires caution and finesse. There are nuances depending on which life season you are in.  Early career, focused on building wealth, primarily in growth stocks? Don’t rebalance in a pull-back.   Retired and taking distributions from your portfolio?  You may want to consider defensive stocks in sectors such as utilities and consumer staples with solid dividends.  Our current bond market requires even further discernment.   Make sure you work with your advisor to determine tax implications before selling holdings outside of your retirement accounts.

Keep an eye on the horizon to stomach the turbulence.  I have been on choppy boat rides.  I have been twirled on the dance floor.  To keep you stomach and head straight, the recommendation is to find a focal point in the distance.  It is the same with our financial lives.  Stay focused on what you are seeking to accomplish with your lifestyle, longevity, liquidity and legacy goals.  Know that this season will ebb into a new one.

2022 has found us on the verge of a recession with the Federal Reserve doing everything it can to mitigate one.  A war in Ukraine, supply chain disruptions, continued inflation and rising interest rates are the clouds to be watched.  Just as our Colorado weather can turn on a dime, the economic weather can change too.  Depending on which economist you listen to, or report that you watch -opinions vary.

What matters is what is within your control.   You can enjoy and even thrive in each economic, life and financial season.  Your success is as much a function of mindset as it is money.  Keep an attitude of gratitude, optimism, and abundance in your toolbox. With these four components in place, you will stave off any fearful market moves or financial missteps when we enter a recessionary season.

Related: 3 Powerful Ideas To Recalibrate Your Cash Value Life Insurance