Whether the Trade Wars end soon or not, the U.S. appears overdue for a recession. Markets, weather, and economies are cyclical. The great boom of the 90s ended with the Tech Wreck of 2000-2002. The U.S. economy was already in recession before 9-11 and there was nothing the government could do to stop the needed cleansing process of an old-fashioned recession.
The 2010s also saw a boom to rival the 1990s. We have Millennials who have worked for ten years and have no clue what it is like to live through a recession as an adult. Unfortunately, many of them still have consumer debt, insufficient cash reserves, and retirement plans that are 100% allocated to stocks.
My crystal ball is just as cloudy as yours and it could be a few more years before the next recession ravages retirement accounts and bankrupts the weakest balance sheets. I can confidently say that the prudent person should create a plan now for how they will thrive during the next recession. Here is my list of the three things to do and not do during the next recession. Let’s start with what to avoid.
Don’t Look at Your Investments Everyday
With almost 20 years of experience as a Financial Planner, I have found that the majority of my clients look at their accounts once a month or less. When the news starts to get bad and markets turn from bull to bear, a segment of people will turn from blissfully enjoying the bull market to hyper-focused, part-time market analyst.
Some of these investors will take the most dangerous step: calculating their all-time high balance and calculating their daily or weekly losses compared to that high. While it should be expected that a moderate portfolio will lose at least 10% during the next recession, losses play the worst mental tricks on people. Instead of recognizing that a 10% loss is well within the range of the risk they were taking, this type of investor will obsess with the $100,000 (paper) loss on their $1 million portfolio. They will go down the slippery slope of thinking about how many years it would have taken them to save that much and. Some people equate their net worth with self-worth and watching their investments so closely leads them down the next mistake to avoid during a recession.
Don’t Look at Financial Pornography
“If it bleeds it leads.” Business television, magazines, and websites need your attention to sell adds. If they dispensed quality investment advice like diversification, thinking long-term, and rebalancing, you would quickly lose interest and go to their competitor’s medium. Instead they prance out the perma-bears to tell you how bad things are about to get. Underneath their names will be information about how they called the last two recessions and the ’87 crash! In a fearful state, many will be suspectable to the seduction of believing that these gurus can predict the future. Few will do a quick internet search to see that they have been calling for a market top every year since 2013 or that they recommended buying gold $500 higher than it is today and Bitcoin at its peak.
During the next recession, people with horrible track records will extract thousands of dollars from investors who don’t know any better by selling their newsletters or taking their investment management fees. As I write this, the S&P 500 is less than 7% below its all-time high and here is a sample of headlines from just one website:
If You Weren’t Worried, Worry Now
Trade Wars are the ‘Enemy of Growth’ Report
This Cycle’s Most Dangerous Bubble, In Three Charts
Risks for the Second Half of 2019 are Mounting by the Day, Part I
Let me repeat, this is a sample of headlines from one website on a day where the stock market is down less than 7% from its recent ALL TIME HIGH! How negative do you think the articles are going to be when stocks are down 30%? If you don’t have a plan now for what to do during the next recession, you are going to be susceptible to the financial porn industry and that might help you make the last big mistake.
Don’t Try to Time the Markets
I have tried many market timing systems, newsletters, and funds. One famous fund I was invested in correctly called the recession of 2008, but then went back into stocks in the fall of 2008 just as the real losses came. Another famous fund barely lost any money in 2008, but then remained hedged for years after the bottom—I think the manager is still hedged. Even if a strategy works over the VERY long term, most investors will not be with the fund/strategy that long because the wrong moves cause emotional damage and it is too hard to stick with a timing strategy that is wrong a few times in a row.
With so many people trying to time the markets, someone is going to get lucky and look like a guru. Don’t be tempted to time markets. Even if you are lucky and get out before markets go lower, I find that when things get really bad, it becomes almost impossible to pull the trigger and buy into a collapsing stock market. You were right about the drop and then you convince yourself it is going to get worse. I have met a few investors in the last ten years that pulled out of stocks and couldn’t force themselves to buy back in because markets were so much higher than the March 2009 low. Timing means you have to be right twice. As Peter Lynch said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Beyond my personal experiences of working with actual humans through two very bad recessions, there is a lot of academic research devoted to this subject. Here is a small sample of articles you can read on the matter:
Next time you are tempted to time the markets, read these market timing quotes from some of the best investors who ever lived. My favorite from the list is:
Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.
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