Forecast

Preparing for, and Navigating through, a Recession

It’s never too early to get ready for a recession.

You have likely seen headlines highlighting the fact that our current economic expansion is the longest in history and that the recent inversion of the yield curve is signaling an impending recession. While the yield curve has been a reliable warning sign of recessions, there are a lot of factors, such as gross domestic product (GDP), interest rates, levels of employment and consumer spending, that help to determine the current stage of the economic cycle and how close we are to recession.

Admittedly, an inversion of the yield curve preceded every recession in the last 50 years. However, on average, it occurred 18 months before a recession and, to that end, all other indicators are currently not signaling a warning.

While – by the very definition of recession – we have at least five months to the next recession, our team does not foresee a recession until at least the end of 2020, or more likely 2021. Further, at this time nothing indicates that such a recession would be prolonged or steep. It is important to remember that a recession is a normal, inevitable part of all economic cycles; it is just a matter of when it comes, how severe it is, how long it lasts, and how prepared you are as an investor.

So, knowing that we have time until the next recession, what can you do today to prepare? While there is no “one size fits all” solution to financial planning, there are sound principles that are broadly applicable to all.

Ensure your emergency fund is available. In the event you have an emergency and need to access funds, the worst thing to do would be to sell investments that may have experienced a loss during a recession. Make sure you have adequate savings available in cash or money markets.

Consider your risk tolerance. You should take time to consider your risk tolerance and time horizon to make sure your asset allocation is in line with your overall appetite for risk.

Rebalance your portfolio. After the strong market performance of late, it is likely your equity allocation in your portfolio is higher than it was a year ago or more. You should review your portfolio to make sure that it is in line with your risk tolerance and financial plan.

Stick to your long-term plan. If you have a long-term financial plan, a recession shouldn’t cause you to deviate too far from that plan. When you start to change your investment allocations because of short-term movements in the market, you start to try to “time the market.” Timing the market is a dangerous game since no one can accurately predict short-term market movements, and you run the risk of selling into market weakness or missing out on a recovery and future market gains.

About the Author

Daniel Trout is a partner at Financial Principles in Fairfield, a HighTower Wealth Management Practice.

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