The term 'recession' often sparks concern based on past experiences. This is particularly true for high-net-worth individuals and high-income earners with more to lose. As 2024 approaches with an increasing probability of financial discord, many investors seek experienced financial guidance to help them weather a potential economic storm.
But what is a recession, and how does it impact you? Many talking heads for mainstream media are discussing the risks of a potential recession. Some say there will be a “soft landing,” while others say we will have a “hard landing.” Unfortunately, no one has a crystal ball that accurately predicts the future.
Keep in mind the talking heads are not financial professionals or economists. They are paid to read monitors, and creating fear is part of their modus operandi. Fear creates followers who are seeking solutions for themselves and their families.
What we can do, however, is educate ourselves and plan for whatever the future may hold. That’s where the services of an experienced fee-only fiduciary investment advisor in Greenville, SC, can make a difference. One of their primary duties is to serve as your advocate and guide, especially during uncertain times.
In this article, we’ll debunk common beliefs about recessions, where fact and fiction seem easily blended by media and other so-called experts.
Knowledge, after all, is not just power; it's protection.
What is a Recession?
The technical definition of a recession is a significant decline in economic activity that lasts for an extended period, often referred to as two or more consecutive quarters during negative economic growth (GDP). However, the formula for determining a recession is more complex.
While the thought of a recession can be concerning, it's essential to understand that recessions are a natural part of the economic cycle. Over time, economies go through periods of expansion and contraction.
The impact of a recession on your lifestyle and retirement can vary. Still, with diligent planning and guidance, you can navigate these challenging times to safeguard your assets and secure your financial future.
Common Misconceptions About Recessions
Although a natural part of our economic cycles, many misconceptions often accompany recessions. Let's address some of these misunderstandings to help you better navigate the complexities of financial planning:
Myth #1: Recessions always lead to stock market crashes.
While recessions may influence stock market performance, they don't necessarily result in crashes. Many factors influence markets, including investor sentiment, corporate earnings, and geopolitical events. Sometimes, the market may even rise during a period of recession.
Myth #2: All sectors of the economy and industries suffer equally during a recession.
The reality is that economic downturns impact sectors and industries differently. While some areas may experience significant strain when you defer the purchase of a new car, other sectors are resilient - for example, you still buy food and use electricity. Consequently, luxury goods may decline in demand, whereas staples or essential services may not experience meaningful changes.
Myth #3: Recessions last for an extended period.
The duration of recessions can vary widely. Some may be short-lived, while others might linger a year or more. However, it's a misconception that they always persist for prolonged periods. Economic recovery efforts, policy measures, and other global influences can expedite the return of a growing economy.
Myth #4: Financial crises are the sole cause of recessions.
While a financial crisis can trigger a recession, they aren't the exclusive cause. Recessions can also result from supply shocks, geopolitical tensions, government spending, or abrupt policy changes that damage companies' earnings.
What Are the Possible Impacts of a Recession on My Retirement Plans
While recessions bring uncertainty, they allow diligent investors to recalibrate, diversify, and capitalize on investment opportunities.
- The stock market reacts to the economy because the economy impacts the growth and earnings of companies. During recessions, when consumer spending slows and corporate earnings decline, investor confidence can substantially decline, exacerbating the problem. Equity markets are often a leading indicator, meaning they experience a downturn before the negative economic data is reported. In other words, they go down before the economy does and often recover before the economy recovers. Disciplined Investors make adjustments (asset allocation, security selection, risk exposure) during this period to take advantage of opportunities - after all prices of securities have declined.
- Central banks often ease their monetary policies during recessions to stimulate increased growth. Their policies result in lower interest rates, impacting bond prices and the growth of businesses. Existing bonds with higher rates will see price appreciation, while newly issued bonds will likely have lower yields. For bondholders, this may mean lower income streams from recent bond purchases.
- Diversifying your portfolio with global investments can safeguard you during economic downturns, particularly if your home country is experiencing a significant impact from the recession. While we live in a global economy, there is still the possibility that some countries are less impacted than other countries. By allocating a portion of your retirement assets globally, you create a layer of protection from having too much money in one country. Think of it as putting your eggs in several baskets versus one basket. This way, if one economy experiences a significant recession, investments in another country may help offset the price dip.
- The real estate sector isn't immune to economic downturns. Declining consumer purchasing power and rising unemployment can reduce demand for homes and office space. This can depress real estate prices for some time. Additionally, tighter lending standards can make financing harder to obtain. For investors, it's crucial to gauge the duration and depth of the recession before making long-term commitments in illiquid investments like real estate.
- Reduced industrial and consumer demand can severely impact Commodities, especially cyclicals like oil. However, safe-haven assets like gold might surge as investors seek safer alternatives. Real estate, hedge funds, and private equity investments may offer additional diversification to protect the principal.
Strategies for Investors During Recessions
The right investment strategies make surviving and thriving during a recession possible. Here are some recession-proof tactics you can apply to your financial plan:
One of the cardinal rules of investing is only to put some of your eggs in one basket. Recessions tend to hit certain sectors harder than others. By diversifying your investments across various asset classes, sectors, and geographic regions, you can reduce your risk of large losses and be opportunistic at the same time.
Understand your risk tolerance. Market volatility can spike during recessions. You can avoid making emotional investment decisions by positioning your portfolio in line with your risk profile and investment horizon (when you need the money). Consider rebalancing your portfolio to ensure it aligns with your risk tolerance.
Maintain a long-term perspective. Recessions, as distressing as they can be, are relatively temporary. The global economy has faced numerous recessions over hundreds of years, and they have always recovered. But every investment will recover in a different time frame. These market declines may be disconcerting, but you may not retire for several years. Staying the course and resisting the urge to make emotional decisions may be your best action.
Go It Alone or Hire a Financial Professional?
One of the most important decisions you can make for yourself and your family is who will help you plan your financial future and invest your assets. You need a team of financial professionals you can trust. That’s why many high-net-worth individuals hire a fee-only financial advisor who can provide unbiased, comprehensive advice tailored to their unique needs.
Fee-only financial advisors are paid a fee like other professionals you depend on for specialized knowledge, advice, and services. Also, this type of advisor does not earn commissions that third parties pay to sell their products. This feature aligns their advice with your best financial interests.
As the economic landscape remains uncertain, partnering with a financial advisor in Greenville, South Carolina, like Global View Investment Advisors, can provide the clarity and direction you need, giving you the confidence to make informed decisions to pursue a secure future, regardless of economic conditions.