- \ Gerard Gruber
- October 2, 2023
The threat of a recession has been looming since the end of the pandemic. But the economy has been stubbornly defying all forecasts, chugging along with a stable labor market, modest but steady growth, and strong corporate earnings. However, high interest rates and food...
The threat of a recession has been looming since the end of the pandemic. But the economy has been stubbornly defying all forecasts, chugging along with a stable labor market, modest but steady growth, and strong corporate earnings. However, high interest rates and food and energy prices persist, taking a toll on consumer sentiment and small business confidence, which are precursors to slowing economic growth. [i]
Though the threat may have subsided over the last couple of years, many economists still think a recession is inevitable [ii] next year. Eventually, they’ll be right—even a broken clock is right twice a day.
Prepare for a Recession with Perspective and Planning
The best way to prepare for the next recession is first to keep things in perspective: Recessions come and go, lasting on average about nine months [iii], and while they come with costly consequences, they are a necessary mechanism for correcting imbalances in the economy. It’s important to remember that, following the last major recession in 2008, the economy responded with a historic, long-lasting recovery. [iv]
Second, individuals can mitigate the impact of a recession on their personal finances with a well-conceived survival plan and prudent financial management. Here are some recession survival strategies worth considering:
- Boost Your Emergency Fund
You should always ensure your emergency fund, invested in a liquid account, can cover three to six months’ worth of living expenses. In anticipation of a recession, consider boosting it to cover 12 months as a contingency for the unexpected.
- Tighten Up Your Spending Plan
If you haven’t been strictly adhering to a realistic spending plan, now is the time to do so. Review your budget to focus on your essential expenses (housing, food, transportation) while trimming unnecessary, discretionary expenses (leisure, entertainment, dining out. Redirect those funds to your emergency fund or pay down debt.
- Pay Down Debt
Pay down high-interest debts as quickly as possible. Reducing your debt burden can free up cash flow and make you more financially resilient. During this period of rising interest rates, you should be reducing your variable interest debt (credit cards) or converting it to fixed debt.
- Diversify Your Income
Explore possible additional income streams. Diversifying your income can provide a safety net during a recession. Consider a side job, freelancing, or monetizing a hobby.
- Contingency Planning
Have a plan in case of a job loss. Stay connected with your professional network and use any downtime to acquire new skills or certifications to boost your marketability.
- Healthcare
Ensure you have adequate health insurance coverage to avoid unexpected medical bills. Consider setting up a Health Savings Account (HSA) for future healthcare expenses.
- Most Importantly, Keep a Long-Term Investment Perspective
It’s critical to remember that, as a long-term investor, you don’t invest for tomorrow or even next year. You’re investing for a whole market cycle and beyond, which will take you through recessions, corrections, and maybe a stock market crash. But just as it has for the last century, it will lead to a stronger market and a more robust economy. With that perspective, you don’t need to fear recessions.
Wealth can’t be built by trying to time the market or economic cycle—it just can’t be done. Wealth is built based on time in the market, which always rewards patience and discipline. Work with your financial advisor to review your investment portfolio. Consider reallocating assets for a more conservative approach that’s less susceptible to market volatility, emphasizing stocks of high-quality, well-managed companies with a track record of generating free cash flow.
Your individual financial situation is unique, requiring a tailored approach to preparing for the next recession. Working with your financial advisor to be proactive and financially prepared can help you not only survive but also thrive during the next recession.
At Harbor West, we like to think of ourselves as practical optimists. While we know that the market experiences downturns, historically speaking it has always continued to come back stronger. That’s why we hope for the best, but take market volatility in stride.
What are you doing to prepare yourself for the next recession? Contact the financial advisors at Harbor West Wealth Management today to protect what you’ve worked so hard to build.
This information is for general purposes and is not intended to provide specific investment advice or recommendations. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. Individuals should always consult their own financial or tax advisor regarding their specific situation before acting on any information provided. Harbor West and Geneos Wealth Management, Inc. do not provide tax or legal advice.
Securities and investment advisory services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC
[i] https://www.cbpp.org/research/economy/tracking-the-recovery-from-the-pandemic-recession
[ii] https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiSiYCh9LGBAxWJmGoFHWN1A3QQFnoECBAQAQ&url=https%3A%2F%2Fwww.forbes.com%2Fadvisor%2Finvesting%2Fis-a-recession-coming%2F&usg=AOvVaw0k66PsD11kj5v2CDmcIWL_&opi=89978449
[iii] https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiVyqXD9LGBAxU1gGoFHUM_ByQQFnoECBAQAQ&url=https%3A%2F%2Fwww.investopedia.com%2Farticles%2Feconomics%2F08%2Fpast-recessions.asp&usg=AOvVaw31tZtAGuSl6cjPQUfsLBrN&opi=89978449
[iv] https://www.cbpp.org/research/economy/tracking-the-recovery-from-the-pandemic-recession