How to Prepare for the Next Market Recession
Updated: Aug 5, 2020
Before 2020, many people had seemingly forgotten that the markets can go down as easily as they go up. Now is a great time to remember that we need to be proactive and plan for these things beforehand. Here is a brief list of ways that you can plan for to help make sure you are prepared the next time the market takes your breath away!
1) Have a Financial Plan
Do you have your goals figured out for how much money you will need in the future, and for what activities? By putting together a financial plan you are able to see the big picture. Yes, you will list out your money and assets, income streams, and goals, but then the other piece you will get to see is how your life will look if the market does go through a recession. By viewing that scenario that will give you knowledge about what life will really look like – and it might not be as bad as you think.
2) Diversify and Considering Bucketing
Having a diversified portfolio is key to investing. Don’t have all your eggs in one basket! But how can we consider investing in ways that are not just owning 4 types of mutual funds? First, we can consider a strategy called bucketing where you set a portion of your investments in an account that is designed to be very stable. It won’t give you the same growth as other kinds of investments; however, the purpose is to give stability and help you to see that it generally won’t go up and down like the news scares you into thinking. Next, there are various investment options for you to be able to consider, so know your options and choose the ones that you feel will help you in your situation the best. Last, have a big enough emergency fund. Three-six months might be what you have while working, but carrying a one year emergency fund can make a lot of sense for someone retired that is worried about market fluctuations.
3) Know the History
Having knowledge about the history of the stock market helps in forecasting what to expect in the future. Did you know that in the case of the great depression and great recession, the S&P 500 came back to its starting point between 4 years and 4 months and 4 years and 1 month? During the internet bubble in 2000 to 2006 it came back in 3 years and 6 months. Knowing that, you could very conservatively say – I feel that I would be positioned well if I had 4 years of the cash I need available to help me to weather any market storms. The only thing left to do would be to have that money in the right kinds of accounts that aims to give you that ability.
4) Consider All Risks
Unfortunately, market recessions bring the risk of the market declining, but there are also other risks that can happen simultaneously. What is the risk of you losing your job or being furloughed? What’s the risk of you ending up in the hospital from stress? What’s the risk of you getting a divorce?
While they all sound like unplannable scenarios, that isn’t entirely the case. If you think you have a high chance of losing your job, consider developing more skills that will make you more critical, and think about how you can start a side job that would provide you with income if something happened to your primary job. If you think that you have a chance of ending up in the hospital, there’s a few things to consider. First, work on your health during the good times. Second, know how much a hospitalization would cost after insurance and make sure you have that in your emergency fund. Third, keep enough time saved in your vacation or sick time days so that you don’t cut off your income while you are out of commission. Finally, if you think there’s a risk of getting a divorce during a market depression, start making steps to correct that now! Prioritize date nights, be present when you are together, and get counseling if necessary.
By taking these steps and thinking things through it can help make market recessions more of an inconvenient annoyance instead of the devastating event it is for so many. Set up a time today to talk through these things with your trusted advisor.
The information contained in this communication does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Andrew Cremé and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance does not guarantee future results. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.