Steps to Take in Preparation of (Impending) Recession
As another Summer comes to a conclusion, all you will hear from TV pundits and news articles is the next recession is impending. It seems a recession is always just around the corner! The Nostradamus of recession predictions is the Inverted Yield Curve which was achieved last week and just in time for Back to School shopping. The yield curve inverts when the 2-year U.S. Treasury bond yield is greater than the 10-year U.S. Treasury bond yield. While many factors do indicate a recession is looming (US-China trade relations, political uncertainty, lack of stimulus from 2018 tax cuts, etc.), several indicate the fear is overblown. The job market remains strong, reduced interest rates by the Federal Reserve and strong corporate balance sheets. The good news is this fear is a constant in the market whether it’s August 2019, August 2017 or August 2008. To achieve sizeable investment returns requires a degree of risk. So, sit back, relax, enjoy the last week or two of Summer and practice the following (whether a recession is looming or not):
- Proper Emergency Fund – 3 months minimum but 12-24 months is not out of the question for some. Understanding how you will react during a recession is not an enjoyable exercise and better to prepare for the worst especially if worried about ongoing employment.
- Access to Credit – much easier to obtain a Home Equity Line of Credit (HELOC) when employed and home values are high. Not only does it provide liquidity but allows you to reduce the amount of emergency funds needed.
- Continued Employment – if work is steady and not worried about staff reduction or cutback in hours then riding out a market downturn is less impactful especially if more than 5 years till retirement.
- Reduce Expenses – no time like the present to understand what the household needs each month to run properly. If cuts need to be made, have a list ready of the first expenses to go (e.g. cable bill, travel, and eating out).
- Investments – never stop dollar cost averaging into retirement accounts and other investments. That is the key to long-term success and a much less stressful path. If investment risk is correct in an up market it should not change in a down market unless you want to be aggressive and reallocate into more equities especially in retirement is more than 10 years away.
The average recession lasts 1.5 years and 3 out of 4 economists are predicting another one by 2021 so make sure to follow the above advice sooner than later. It’s always best to pack the life jackets before leaving the shore!