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If you have been listening to the news there seems to be a lot of discussion about an impending financial recession. We at First Financial Consulting respectfully disagree. In the majority of these cases, a financial recession is rarely the outcome. We don’t know of any analyst or company that has ever been able to accurately predict the market. In our experience, market timing has proven to be an impossible task and a fool’s errand.
How to Prepare for a Financial Recession
So, if we can’t predict market recessions, how can we prepare? Well, there are several ways in which we can prepare for a recession. We mentioned earlier that market recessions are rare, but that should not mean that we shouldn’t plan for them. A good financial plan should include safeguards against a market recession. Here are three things your financial plan should include to protect you from any future recessions.
Asset Allocation and Diversification
If you have an investment portfolio, hopefully, you are diversified. Why is this important? Well to start, diversification exists to protect you from risk and volatility in the market. There’s no way around this. No matter what stocks, bonds, or mutual funds you are invested in, no one fund is perfect or prone to financial difficulties. Diversification allows us to invest our money into different markets and asset classes so that even if one or more of these funds underperform, we still have other investments that will mitigate this impact.
Our lives and goals have a way of changing and we understand that. An investment goal or market allocation that you’ve established in the past might not be the best path forward for you in the future. It’s important to continuously check to see how your investments are performing and also evaluate ways in which your money might perform better. No plan is perfect, so it’s important to always be rebalancing your portfolio.
An emergency fund is a crucial part of your financial health. It is a financial safety net that protects you from market recessions or unforeseen expenses that you might incur in the future. If there is an emergency, you don’t want to have to liquidate funds from your investment accounts at an inopportune time. Instead, you should have three to six months minimum saved up in an emergency fund so that if something happens, you will be prepared.
Financial Recession: Inevitable, But Not Necessarily Detrimental
Recessions are an inevitability of investing. There’s just no way around them. However, if we look at past market recessions, we can see that not every market downturn has been as dramatic or detrimental as the media has led us to believe. In behavior finance, there is something called recency bias. I short, recency bias is a cognitive bias that convinces us that new information is more important than old information. If we look at the history of the stock market, we know that not every recession was as harmful as previously forecasted. The same goes for our current market situation. A lot of people are afraid that if we have a market recession it will be just as harmful as the 2008 financial crisis. It’s important to realize that not every recession turns into a financial crisis.
To end on a positive note, we are currently in the tenth year of market expansion. This means that this is currently the longest period of economic growth that we have ever had. Yes, market recessions are inevitable, but this does not mean that you can’t achieve your financial goals. If you have any questions about the current market situation, feel free to give us a call. We’d be happy to answer any questions you may have about recessions or investing in general.