The term “recession” is getting a lot of airtime right now, especially after two consecutive quarters of negative GDP growth (-1.6% Q1, -0.9% Q2). While this rule of thumb for defining a recession is by no means the unanimous choice of financial analysts or economists, the feeling is widespread among many market watchers and economists that the US economy is due for a cooling-off period, as evidenced by the rapid expansion following the COVID-19 downturn and the related spike in the rate of inflation.
Let’s face it: recessions can be scary. They’re also impossible to predict, whether we’re talking about the onset, duration, or severity. Since World War II, there have been 13 recessions, and they lasted an average of about 10 months (the longest, the Great Recession of 2008, lasted about 18 months; and the shortest, the pandemic-induced recession of 2020, lasted just two months).
But let’s not forget the flipside: every recession in history has been followed by an expansion. And here’s the better news: expansionary cycles tend to last a lot longer than recessions. Since World War II, the average expansion has lasted just over five years. In other words, it is very likely that, waiting on the other side of the next recession—whenever it is—there will be a period of economic growth that will be more than five times as long as the downturn.
All this raises the question: How can you prepare for a recession so that you’re ready for the start of the next upswing? There are things you can do now, or even during a recession, that will allow you the maximum benefit during the next expansion. In the same way that experienced ranchers use periods of drought to get ready for the next rainy cycle, you can utilize the opportunities presented by the recession to position yourself for the better times that probably lie ahead.
1. Boost savings
In hard times, cash is king. Even though currently high inflation is eroding the purchasing power of your dollars at a faster rate, building your savings—especially your emergency fund—will afford you both flexibility and peace of mind if the economy takes a temporary powder. And don’t forget about your 401K, IRA, and other retirement plans. Many people take a sabbatical on funding these accounts during a recession, but that’s the opposite of what you should be doing (and see more on this below, under “dollar-cost averaging”).
2. Look for bargains
In a recession, prices tend to fall—in the financial markets and everywhere else—because demand is dropping. For sellers, that’s not such good news. But for buyers, this can mean it’s time to go shopping (what Warren Buffett calls, “Being greedy when others are fearful”). The fact is that those who are in a strong financial position (see “Boost savings,” above) can pick up valuable assets at bargain-basement prices during periods of slowing economic activity. This can include equity investments (when stock prices of otherwise solid companies are depressed) or even your dream home (when demand is low and housing prices are dropping). The key here, of course, is preparation. Just like the rancher who digs a new stock pond during the drought to catch more of the coming rains, you can be ready to take advantage of opportunities to leverage current low prices into potentially high future gains.
3. Dollar-cost averaging
Tying in closely to the previous point of boosting savings in your retirement accounts, recessionary times offer the opportunity to reduce the average cost of your investments. By periodically and systematically contributing a set amount to your IRA, 401K, or even a non-qualified investment account, you will always be buying a greater number of shares when prices are lower, and a fewer number of shares when prices are higher. Over time, as the assets increase in value, your total return will be greater, as well. Rather than trying to time the market (which no one can do with better than random success, anyway), you are constantly adding to your portfolio and “averaging down” the cost of the holdings. Prices are unlikely to ever be lower than during a recession, so take advantage by maintaining your regular deposits and asset purchases.
JFS Wealth Advisors is dedicated to one thing: guiding our clients toward their most important financial goals. Our fiduciary service means that our clients receive advice and recommendations that are offered with the client’s best interests foremost. To learn more, read our recent update, “The Fed Is from Mars; the Economy Is from Venus.”