Survival Guide: Preparing for and Lasting Through Economic Downturns
Recent Downturn
Since graduating from college in 2015, this is my first bear market. I have obviously read about them and heard people talk about their experiences, but for many under the age of 35, this is the first time we have felt the market in our own investment accounts. Now as a financial planner, I am observing in real-time how people are responding.
As of March 23, 2020, the S&P 500 was down 30.4% year-to-date. In addition to the market drawing down 30+%, it’s been an extremely volatile time. Within the last month, we’ve experienced 7 days of 4% or greater down movements with annualized daily volatility 5.5 times greater than the most recent decade.
Understandably, amongst health concerns, social isolation, and the broader economic uncertainty, this has initiated anxiety and stress for many individuals. I’ve noticed this most specifically on my periodic trips to the grocery store. I can’t help but watch other faces lining the store lanes. For some, their fear and anxiety are palpable, building up as they go through another half-empty aisle, while others meander without the appearance of too much concern. So, what sets these people apart? Why are some so anxious while others are displaying confidence?
6 Tips to React and Prepare
Since the end of World War II, there have been 26 corrections, 12 of which have turned into bear markets, according to CNBC. If we believe history will repeat itself, we can believe that downturns like this will happen again. So, whether you are feeling anxious or confident, here are six things you can do during this recent market downturn and to prepare for the next one:
Have an emergency fund in place!
This is typically a top priority when we go through planning with clients. The general rule of thumb is to have 3-6 months of non-discretionary spending in cash (checking, savings or money market account), although this is dependent on factors like work, family, charitable giving and your definition of “non-discretionary.” This should be readily available for you to access in times when the global economy has gone awry, the industry you work in is floundering, or your roof unexpectedly needs to be replaced. Too much can go wrong in this world, and it is best to be prepared so those events don’t hit as hard. I understand for some this may not be currently feasible. Take care of the big four: food, shelter, transportation and clothing now, and work towards this goal with any available excess.
Prepare a budget (and review it regularly).
For many people the word “budget” is a foul term and only used by those that are just scraping by. It can be argued that a budget, if utilized properly, is a confidence-building and freedom giving tool for everyone, no matter the bank account size. Creating a budget will also enable you to be more strategic in how you spend your money and how much you will need for your emergency fund.
Live under your means.
It is difficult to go backward on lifestyle and much easier to take a step forward. Give yourself some margin so you aren’t pulling from your emergency fund when income may not be quite as high or when the price of goods and services increase.
Be properly allocated.
Risk is not bad, but the amount of risk you take should be in accordance with factors such as your age and your overall financial situation. Too much risk will eventually cause a lot of pain and may force individuals to sell at the worst time or alter their financial plans. The key is finding the right amount of risk for each investor. Be careful to diversify away from your industry, particularly if your industry has noted volatility and job risk like energy.
Keep your eyes on the right horizon.
We recently wrote blogs on market volatility and market corrections. If you have a long-term horizon, these dips really don’t matter that much. If they do matter, then having the right allocation is essential at all times (see previous point).
Give!
During times of crisis it is easy to become “me-centric.” Charitable giving reminds us of our abundance and can be a great antidote to anxiousness when things may not be going as we would prefer. If we do not give from our abundance during the good times, then it is unlikely that we will give during the hard times. As Mother Teresa is quoted as saying, “God gives us things to share; God doesn’t give us things to hold.”
Stick to the Plan
Although we could not see the impact of COVID-19 coming earlier this year (not implying we could see other downturns coming), events like these that cause market turmoil are an expected part of investing. This latest market downturn serves as a great reminder as to why investors should be allocated properly according to risk and diversification. Situations and goals are sure to change over time which will lead to minor tweaks along the way. However, whether the market rises or falls, we encourage sticking to a well-developed plan – one built for the good and bad times.
If you feel you have not been served well in working toward your goals, please talk to us about how we can help prepare you for the future.
