Hope for The Best; Plan for The Unknown

Lately, I have receiving a number of calls expressing concerns about a possible future recession. To be clear, I’m not attempting to predict a recession.  But with the “recession” word being used often on newscasts, I’m finding myself offering advice to those concerned. 

My general advice is not too different from the advice I give to anyone who is concerned with their future financial stability. The truth is that the future is never certain. Unforeseen layoffs, health issues and, yes, recessions, are all but a few possibilities. The good news is that most people who prepare for the future not only survive these financial contingencies, but many end up thriving. In short, the best way to weather any financial uncertainty is to be prepared.

The most common concerns many of my clients express as a result of a potential recession are:

1. What happens if I experience a potential drop in the value of my investments?
2. What happens if I lose income due to a reduction in hours, or layoff?

It is important to fully understand someone’s source of financial stress, and whether it is investment value only, or something greater such as financial instability.  To do a proper assessment, it’s important for a client to give me a financial snapshot of where they are now to determine more accurately how recessionary movements may impact them. An accurate assessment will result in a financial plan that will help one feel as good as one can about the future. Let’s be honest, no one likes negative surprises. But it’s best to have a plan for the worst-case scenario so that we can stay focused on growth when results are not the worst!

Risk Assessment

For those worried about stock equities dropping in value as a result of a recession, I would recommend assessing your risk tolerance with your financial advisor. It’s important to discuss how much of a loss you are comfortable in terms of both percentage and total dollars, and how long you are willing to wait timeframe-wise to see a recovery.  It is best to discuss this now with your advisor while your risk concerns are heightened, as a prior version of your risk tolerance may suggest you are a long-term investor who is very tolerant to market downturns.  That may not be accurate today, nor should your fear today result in divesting everything you own in investments.  Strike a balance between reasonable growth and downside protection.

Build Up Your Emergency Fund 

If the recessionary concern is more than just market value of investments, then the first thing I would recommend is identifying or establishing your emergency fund.  This fund will provide cash flow in the event a recessionary layoff prevents you or your family from earning income, or it provides cashflows for retirement or vacation needs so that existing investments can work their way through the recessionary and rebound periods. The optimal emergency fund is often cited as a minimum of 3 months income and a maximum of 6 months, but it should really be tailored to your needs, considering your concerns about income stability and your amount of expenditures, investments and debt levels.

It is also very important to be aware of where this emergency fund is being accumulated. If your emergency fund is invested, it’s best to ensure that those investments are reasonably liquid and risk-free from market downturns. 

Where and How are You Spending Your Money?

Another important factor to mitigate recessionary concerns is to pay close attention to where your money is going. Taking time to look at how you are spending your money is important but identifying areas where you may be spending too much is critical. These items tend to be in the discretionary areas (e.g. entertainment and travel). It’s generally not necessary to cease all spending in these areas but reducing or reigning in those costs can make greatly aid in building up your emergency fund or handling future shocks to your employment income. 

Planning Is the Key

At the end of the day, it’s important to remember that a recession is not the end of the world, but rather, a natural part of the financial cycle. Yes, it can create financial stress, but there are things that can be done to survive it by planning now!