Financial Tips For Weathering a Recession
The U.S. economy recently entered its eleventh year of expansion, making it one of the longest running growth cycles in modern history. Yet trees don’t grow to the sky, and there are signs that a recession, even a mild one, could be looming on the horizon.
The economy is producing mixed signals. On the positive side, job growth has been steady with unemployment that hit a 50-year low in September at 3.5%. Yet one worrisome sign that surfaced earlier this year was an inverted yield curve where long term interest rates moved lower than short-term borrowing rates. In this case, the 10-year treasury yield dipped below the 2-year treasury. Historically, an inverted yield curve has preceded a recession by 18-24 months.
What exactly is a recession? Generally, it’s a temporary economic contraction with at least two consecutive quarters of negative GDP growth. Economies have up and down cycles, and at some point, a recession is inevitable. The top economists have varied opinions on when a recession is likely to hit, how deep it might be and how long it might last. However, most are predicting a relatively modest decline – nothing on the scale of the Great Recession of 2007-08.
The current pattern of slow and steady growth may continue for months or even years to come. Even if the economy is not at the end of its long bull run, the current cycle is clearly in the later stages of the growth cycle. So, it is an ideal time for investors to re-evaluate investment portfolio and strategies with the possibility of a potential recession in mind. Some tips to help investors weather a recession include:
- Review and update investing strategies in relation to your financial goals and objectives. Investors who have a short-term investing horizon, such as those who are nearing retirement or a major expense, may want to adopt a defensive strategy. For example, it may be wise to reallocate investments to include more stable, fixed-income assets to preserve capital and income rather than take a chance on riskier investments that could see a sharp drop in value during an economic downturn.
- Cash is king. Consider increasing capital reserves to maintain liquidity that will help to weather some of the negative impacts of a downturn, such as an unforeseen reduction in dividend income or lower stock values that make it less favorable to sell assets to access capital.
- Take advantage of profits. Despite stock market volatility, valuations remain near cyclical highs. Consider selling investments to cash-in on gains and use the proceeds to increase cash reserves, pay down debt or reallocate proceeds into other assets.
- Improve portfolio diversification. Portfolio diversification is important in both up and down economic cycles. Not only is it wise to not put all of your eggs in one basket so to speak, but it is important to allocate a portion of investment portfolios to alternative assets, such as real estate, that move counter to stocks and mutual funds. More specifically, investment in private real estate vehicles offer greater stability versus publicly traded REITs, which also are subject to stock market volatility.
- Assess your risk tolerance. Some investors see a recession as a time to move cautiously and adopt a more conservative investing strategy. Others might see a down market as an opportunity to take risks that could generate some big returns when the economy regains its footing and starts moving back up. There is no right or wrong answer in investment strategy. Each investor needs to develop a strategy that fits with their financial goals and objectives, as well as their tolerance for risk.
- Work with a trusted advisor. As always, there are many investment options available today in both traditional and alternative assets. It is always wise to work with an advisor who can assist in providing objective guidance on portfolio strategy and investments that best fit with your financial goals, objectives and risk tolerance.