ARI BAUM CFP®
WE KNOW RECESSIONS ARE INEVITABLE. WHEN THEY HAPPEN, THE SCARY NEWS IS BLASTING ON CABLE 24/7. YOUR FRIENDS, NEIGHBORS, AND COLLEAGUES MIGHT PANIC ONCE THEY SEE THEIR PORTFOLIOS DROPPING, AND TO MAKE MATTERS WORSE—IT’S UNLIKELY THAT THE NEXT RECESSION WILL LOOK LIKE THE LAST ONE—SO HOW DO YOU KNOW WHAT TO EXPECT?
To the savvy (and well-prepared) investor, a recession can be a financial gift. They allow prices to pull back and bubbles to deflate. Smart investors have the chance to buy on sale, taking advantage of bargains when others panic, selling because they weren’t prepared.
The market bottom of the last pre-pandemic recession was March 9, 2009, but no one knew that at the time. For all investors knew, the market had farther to fall. We only know that was the bottom in hindsight.
It’s not likely to be high-flying dot-com stocks or the financial sector that take the economy down next time. What will it be? No one knows for sure, but whatever it is, it’s coming.
The good news in all the uncertainty is something wealthy individuals have long known: there are juicy opportunities hiding in the dips. Easy to say, but what about when the next recession arrives?
The trick is to keep your head level and stay alert. When you have the right tools, it’s possible to seize opportunities to make money and avoid the ugly mistakes that average investors tend to make during hard times.
Escape Lever #1: How exposed are you?
If you’re early in your working career and all of your investments are designated for retirement, you’re able to ride out the inevitable recession with a portfolio that’s entirely invested for growth. You just have to avoid panicking and selling out.
In this case, you’re a couple of decades away from needing the money. Staying invested through a nasty experience like the Great Recession, can potentially lead to a much larger portfolio later when markets recover.
On the other hand, if you’re closer to retirement, you can’t afford for your entire portfolio to drop right when you need to start withdrawing money. That means having some money in other assets like cash and bonds.
Escape Lever #2: Flex your flexibility
When it comes to buying cars, clothes, and even vacations, what are the three magic words all purchasers love to hear? “It’s on sale.” Yet too many investors start pushing the panic button and selling when the stock market goes on sale.
Stock dips (and yes, crashes) are the time to scoop up some potential bargains. To paraphrase Warren Buffett, be greedy when others are fearful and fearful when others are greedy.
Just make sure that you’ve still got your cushions against the freefall of the market. Don’t deplete your protection against stock market dips. Keep your hedges intact and your income flowing.
Ugly Mistake #1: Investing with your heart and not your head
Contrary to popular belief, acting like an ostrich and sticking your head in the sand may not be a bad way to deal with a recession! It helps to ignore the financial news because it’s going to be full of gloom and doom in a recession.
Many investors turn paper losses into real ones by making the mistake of panicking and selling at the wrong time—after prices have already started dropping. When recessions arrive, it’s easy to be paralyzed by fear and stop investing completely. This happens even to smart people!
Wealthy investors know that it’s too easy to get caught up in the fear around a recession, and so they hire professionals who have been through recessions to help prevent them from leaping off the ledge. They also diversify their portfolios when necessary, so that they can sleep at night knowing that a stock market drop won’t wipe out the value of their portfolio.
It’s very easy to get greedy when prices are rising and fearful when prices are falling. But smart investors find ways to stay out of the fray so they can focus on building wealth for themselves.
Ugly Mistake #2: Going it alone
When recessions arrive, things can get really ugly very quickly. It’s hard to tell exactly when the recession has arrived, since the economic data takes a while. Market drops don’t always predict a recession, either. Is a one-day market drop just the start of a massive plummet to the bottom—or is it just a blip?
Doing it yourself looks fine when prices are on the upswing, because a rising tide lifts all boats, but when the seas get rough, and your portfolio may be threatening to overturn during the onslaught, experienced deckhands can help keep you afloat.
You may notice that wealthy investors ask for help all the time! They have dedicated financial professionals to help them navigate when the economy gets choppy. They’re not trying to figure everything out by themselves, because they recognize when they don’t know what they may need to know.
The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance does not guarantee future results.
Ari Baum, CFP® is the founder and CEO of Endurance Wealth Partners, with over 25 years of experience in the Financial Services industry. He brings his in-depth experience to Conceive, Believe, Achieve, for his clients.
Securities and Advisory services offered through Prospera FinancialServices Inc. Member FINRA/SIPC.
Brokerage and Advisory accounts carried by Wells Fargo ClearingServices, LLC.
