Rather than trying to react to market mood swings caused by the coronavirus chaos, here are proactive steps you can take instead to be ready for a highly probable recession.
Each is within your control, and any of them can add real value to your financial well-being. As the late, great financial economist Peter L. Bernstein once said, “it’s not your wealth today, but it’s your future that you’re really managing.”
First, what Is A Recession? The National Bureau of Economic Research says a recession happens when there is a “significant decline in economic activity spread across the economy, lasting more than a few months.” This shrinking is measured by the GDP (gross domestic product), which is otherwise known as all the goods and services made and produced by the American economy.
What can you do now to be equipped for a recession?
How to Prepare for a Recession
1. Stick with your plan - No matter how you feel about any or all of these issues, you may be thinking twice about your investments. Should you try to shift your portfolio to higher ground, until the coast seems clear? Might these stressful times justify a measure of market-timing? If you know us well, it won’t surprise you that we’re against the idea, regardless of how the coming weeks and months unfold. Market-timing may offer brief relief, but it ultimately runs counter to your best strategies for building durable, long-term wealth. So, despite unsettling breaking news on the coronavirus or anything else to come, we still suggest your best course is to grit your teeth and stick with your carefully structured investment portfolio.
2. Set up or beef up your emergency/rainy-day fund - It’s great to be investing toward tomorrow. But in an emergency, you may need cash today. Be sure to set enough aside, so you won’t need to take costly loans or sell holdings at inopportune times. Ensure your emergency fund is in a fully FDIC Insured account and your balances are within the limits covered by FDIC insurance. Link it electronically to your day-to-day checking account so that you can easily transfer money between the two when you need to.
3. Establish or increase your retirement plan contributions - If you do not have even close to the right amount in your emergency/rainy-day fund reserve fund and/or you find yourself in a vulnerable job position, a stressed business owner or have high overhead to support, ignore the following and attend to your reserve fund. Check out the NY Times take on How to Build an Emergency Fund in the Middle of an Emergency; every little bit can help. But IF you do, read on. The more you invest toward retirement (or similar goals), the better you can employ compound interest and market returns to accelerate your efforts – especially if your employer matches your contributions. While counter intuitive to invest in a falling stock market, you will be able to capture lower prices and accumulate more shares of your investments as markets decline.
4. Revisit your estate plans - Even if you’ve already established your estate plans, if it’s been a year or more since you’ve looked at them, odds are they’re due for a refresh. Don’t let your estate planning intentions go nowhere. The unfortunate reality is pandemics come with death, and you need to provide for those who count on you and those for whom you are caring. We would also encourage you to create and continue to update your Everplan, a value added service provided to all Lifeguard Wealth clients.
5. Pay fewer taxes and tax-loss harvest - While we expect markets to climb over time, periodic downturns happen, like now. They can leave you feeling left out in the cold. But it is possible to pay fewer taxes and boost investment returns when markets recover.
6. Rebalance your investments - Every investor wants to buy low and sell high. What if we told you there is a disciplined process for doing just that, and staying on track toward your personal goals while you’re at it? Guess what? There is. It’s called rebalancing. On an emotional level, it can be challenging to sell what’s done well and buy more of what’s declined in value, while markets are gyrating. Rebalancing using evidence-based investment strategies makes a great deal of sense once you understand the basics. It offers objective guidelines and a clear process to help you remain on course toward your personal goals in challenging markets. It ensures you are buying low and selling high along the way. It may be prudent, however, to dip your toe in a little and only rebalance back partially to being fully invested back to your full level of equity exposure due to the velocity of falling markets. This is your call.
7. Time for a Family Financial Audit - Managing a household is challenging enough without having everyone home from school and from work together. Are the roiling markets or the threat of a job loss or worse keeping you awake at night? We would suggest sitting down together with your partner and getting up to speed on where you are at now and review all things financial. Think of it as a stress-reliever. It’s comforting to be informed and educated about your money, just in case. Defuse the risks of a financial fallout now and do it together. We recommend you both become familiar with the following essentials, including what exists for each: Income and spending levels; banking and investment accounts, company retirement plans (with current and former employers); outstanding debt (including mortgages, college loans, credit cards, etc.); estate planning documents (wills, trusts, advance directives or “living wills”) and insurance policies (home, auto, life, medical, long-term care). In addition to knowing what you have, it’s important to know who you can reach out to for help. In short, essential financial know-how builds confidence and confidence can be in short supply when chaos is in the air. If a recession lasts long, you will need all the confidence you can get.
Preserve What You Have
8. Cut unnecessary costs - Cancel subscriptions or services you haven’t used in months (magazines, streaming services, club memberships, work related monthly parking, etc.). Ok, keep the streaming service as we are all hunkered down with the family at home now. Be aware of the difference between wants and needs.
9. Reduce debt - Consider paying off credit card balances and other high-interest loans, but only if your emergency/rainy-day fund is well funded. Then do a little of both, but have a plan and stick to it.
10. Negotiate on the rest - Manage costs for all types of services you pay for on an ongoing basis. It’s possible you can lower prices on things like insurance and other ongoing costs by seeking periodic competitive bids. Negotiate with vendors to reduce “fee creep.” Be a squeaky wheel!
Protect From Risks
11. Freeze your credit - We have written about this extensively here. Shut out identity thieves with a freeze on your credit reports. It’s now free to freeze, and temporarily unfreeze your credit reports when needed.
12. Freeze your kids’ credit - Unfortunately, kids are prime targets for identity thieves. Create and lock down their Social Security Number and credit reports, before anyone else does.
13. Keep an eye on things - Order and review your free annual credit and Social Security reports.
14. Access the risks of elder abuse for you or others - Whether you’re growing older yourself or you are the son or daughter of an aging parent, it’s hard to imagine a day might come when we who have spent a lifetime protecting others may someday need protection ourselves. And whether it happens overnight or over time, it’s a hard role to accept.
15. Establish a Trusted Contact Person (TCP) - Name a TCP as an extra line of defense for your investment accounts. If your account custodian feels you are being financially exploited, they then have a back-up person they can talk to about some of their concerns.
16. Declutter your portfolio management - Over time, most families end up with a confusing array of investment accounts across multiple custodians. Where possible, organize your accounts across fewer platforms, so you can better manage your moving parts. This might be easier to do in less turbulent times. You be the judge. We also offer an account aggregation tool called Wealth Access at Lifeguard Wealth. This helps to provide that consolidated overview.
17. Unsubscribe from something - You may also have accumulated hordes of e-newsletters through the years. Some may be useful, but many others may merely distract. Pick a few you never read anyway, and unsubscribe (or, if the source is suspicious, mark them as junk).
18. Find time to take care of yourself - Think of the airline pre-flight briefing … In the event of cabin depressurization, put your mask on before attending to your children. The same applies here, take time to take care of yourself so you can be there for others. Are you eating well, getting enough sleep, meditating, exercising, practicing social distancing, etc. Don’t abandon your healthy routine. If you don’t have one, reach out to me, and I am happy to share mine.
19. Hire a fiduciary advisor - There are so many effective actions you can take to contribute to your total wealth, we’ve barely scratched the surface. None of them are terribly time-consuming in isolation, but it can feel overwhelming to consider them as a whole. Plus, a coordinated effort usually yields the best results.
20. Have faith in others and be optimistic - Know you are not on an island. No one is. Others are suffering through the change along with you, both personally, professionally and financially. Rely on your family, close friends and network to solve problems, offer each other help, give and get support and laugh once in a while. In the end, this too will pass.
Be Proactive and be Ready for a Recession
Remember, recessions generally mean an economy will be in the slumps for six months or more. Be proactive by taking care of your personal economy now. You can do this!
If you have questions about the markets, your financial plan or just want to talk, we are here for you.