What To Do If There is a Recession
At some point, there will be an inevitable recession. Hopefully, it is far in the future, but who knows? Once in it, it will be much harder to react than if you prepare for it, so here are some protective things you can do now.
Actually, when you think about it, an investment program should be a long term project able to withstand temporary setbacks and drops in the economy, market or interest rates. Occasionally there are prolonged aberrations such as we have experienced with low-interest rates over the past decade, stock market crashes, corrections or bear markets or wide economic swings leading into huge drops. However, a carefully conceived plan for long term financial security should be able to withstand these swings and history has indicated this is so. However, let’s examine some individual pieces of this plan and see if we can fit them together in a way that provides calm in the face of market adversity.
- Plans should be for long periods, at least 10 years, and swings should be expected, so when they occur it needs to be taken as part of the vagaries of investing and the market and not cause too much consternation
- Market downs are always upsetting, probably more so than the ups being exhilarating and we tend to remember the bad things more so than the good things. Just because down markets make us feel crummy doesn’t mean we should abandon carefully thought out long term investment plans
- If there are major changes in your situation or a major shift in the markets, your plans need to be reexamined, and perhaps reexamined every time you review your portfolio, but that shouldn’t necessitate precipitous actions or changes in the plan. Those changes should occur when there is a major change in the underlying conditions which would be an infrequent occurrence
- Panicky changes should never be executed. You should always have some quiet time to reflect on the reason for changes and its timing
- If you make changes you need to consider what you will change into. Will it be other investments or cash in a holding pattern, and if the latter what will the call to action be that will cause a change back into the market. Usually, for many that call never seems to come until after many lost opportunities, making the investor eventually wish they never made the first change
I have a suggestion on how to deal with the inevitable downturn or recession and the suppression of any desire to make changes. Here it is in two bullets:
- Make sure you have a rainy day fund sufficient to carry you for two years so you do not have to liquidate any investments during that period. This can be set up with 25% of the cash you determine you will need for that period in a checking or money market account. The balance can be invested in three equal CDs that are laddered with one coming due every six months thereafter. If you don’t need the money when the first CD comes due, invest it in another CD that will mature six months after the latest CD in your ladder string. This will keep you liquid and not have you have to do anything if there is a market downturn
- Do nothing else – stick to your plan. It is a long term plan and predictable short term changes should not cause abandonment of that plan
Long term plans are that, and short term activities shouldn’t cause changes…unless the original plan wasn’t planned so well.
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