While the economic decision and policy maker’s debate continues to dither around making a market recession “official,” everyday Americans are already dealing with the reality of higher prices, slowing growth, and a bear market.
This is especially true for those near retirement. During this turbulence, you might be wondering:
- Will I still be able to retire “on time”?
- Should I make any drastic changes to my portfolio?
Since economic activity is cyclical and recessions are inevitable in our lives, there are some tried and true ways to beat market anxiety and even make some money.
Let’s dive into how you can better prepare for and navigate a recession.
Preparing for Market Recessions
Like an ocean, the economy moves in waves. As much as we all want a steady, upward trajectory to universal growth and progress, it’s normal to see bear and bull markets. Bull markets are generally favorable and accompanied by an appreciation of value, and bear markets are the opposite, with a general depreciation.
Take a look at this historical view of the market. On average, bear markets last 9 months. The most recent recession caused by COVID only lasted 2 months, while the 2007-2008 financial crisis dragged on for 18 months. Here’s the silver lining: bull markets usually hang around for about 4 years.
Recessions only feel like they last forever, but bull markets have a much longer shelf life.
Click on the chart to learn more about each recession. Image credit: Dimensional
As an investor, it doesn’t benefit you to see a bull market as “good” and a bear market as “bad.” What these designators should do is help you adjust and determine how to handle your investments.
Investing Through Recessions
The market reacts to many triggers, one of which is how much faith people have in the economy. When the market is up, people believe it will grow and want to invest. When the market is down, our instinct is human: cut and run!
But the data encourages investors to keep their money in the market.
Of the 15 recessions in the last 100 years, 11 showed positive returns as soon as 18 months after the recession started.
What goes down doesn’t stay down. In fact, it rebounds stronger.
Since 1929, the market has yielded an average 10% return. Not every stock will hit that average every year, but over time, you’ll earn more by keeping your money in the market.
Need a little more proof?
J.P. Morgan looked at the 10 best days in the market over the last decade. Can you guess when they were? The day after some of the biggest losses.
One reason this happens is that investors see an opportunity to buy when the prices drop. If you’re one of the investors who hold on even when the market slumps, you’ll likely see sharp gains not long after.
When It Comes To The Market, Don’t Trust Your Gut.
It’s hard to be a bystander watching your investments lose money and unable to do anything about it. Loss of control can trick us into thinking that by taking action, we can soften the blow.
But this idea makes us fall into the trap of believing that we can time the market.
Market timing is a fool’s errand—even professional investors and analysts get it wrong. Why? Because to properly time the market, you must do so twice: when you sell and when you buy.
If you sell at the wrong time, you undercut your net gains. If you buy at the wrong time, you could end up paying far more than you had to per share.
When the markets are down, resist the temptation to try and time the market. As we’ve witnessed from the historical data above, the market favors the long-term. So most people benefit from sticking through the lows to fully enjoy the highs.
But how do you beat the urge to guesstimate with your money? Try some of these techniques:
- Stay where you are. Data and history are on your side, as long as you stay disciplined through volatile markets.
- Resist acting on fear. Fear of losing money may push you out of the market. Sadly, fear of missing out will also hit you when you aren’t investing. Following fear can inspire hasty exit and entry strategies.
- Cash doesn’t make returns. When you cash out your investments, you pay taxes and lose out on expected returns. If you want your money to make money, you must keep it invested in the market.
- Markets are unpredictable. You can’t accurately predict when to successfully exit and re-enter the market all the time.
Turning Recessions Into Opportunities
Any bump can be discouraging when you’re getting closer to retirement because you don’t have much time to recover what you’ve lost. In that case, staying the course may not be enough to make sure you meet your retirement goals.
But recessions can also be nesting grounds for opportunity. Here are some ways to reframe your loss with savings and gains.
Consider Roth Conversions
Converting (all or a portion of) your retirement funds, such as a 401(k) or traditional IRA, into a Roth IRA can help you save money on your tax bill long-term.
Roth conversions can benefit high earners whose income exceeds the thresholds to directly contribute to a Roth IRA. The goal is to build up tax-free income in retirement. Doing so gives you more flexibility over your spending, tax bracket, and wealth transfer goals.
But it’s not without its downsides. You must pay taxes on the conversion in the year you make it. Plus, if it’s a new Roth IRA, the money has to sit for five years before you can withdraw the earnings tax-free. This strategy carries distinct pros and cons, so talk with your advisor and tax professional first.
Tax Loss Harvesting and Rebalancing
You can reduce your tax bill by selling some stocks (or funds) at a loss to balance out a gain from another profitable stock. Think of it as pruning your investments.
Say you have one stock that’s consistently underperforming (a couple of quarters or so). It might make sense to take the loss and sell that stock to offset other gains or to realign your asset allocation with your risk tolerance.
Recessions are great at spotlighting market-resistant stocks and others that aren’t as stalwart. It may be beneficial to sell the ones that look less able to weather the storm.
Personal Risk Tolerance and Asset Allocation Evaluation
How you allocate your assets is personal and will change with age and income, so be sure to shift them to fit your goals and capture earning opportunities. Ask yourself:
Am I on track to retire when I want?
Are my retirement accounts sufficient for my lifestyle?
Can I maintain my assets when I retire?
It’s also essential to know how much risk your assets can handle. This isn’t just how much you’re willing to lose, but how much you can lose and still meet your financial targets.
Diversify Your Portfolio
This old phrase is a classic for a reason: don’t put all your eggs in one basket. Part of being financially flexible means having a diversified portfolio.
As you move closer to retirement, you’ll likely require a different mix of equities and fixed income. It’s important to teeter the line between preserving your fixed income and investing for long-term growth.
The Moral of This Story: Ask for Help
Recessions are inevitable and unpredictable, but they don’t have to cripple your investments. You can take proactive steps to protect your money and even find opportunities to make money. By being vigilant, you can ensure you will have enough money to support yourself throughout your life regardless of the market.
At Metanoia, we’re focused on relieving the stress of money management, so you know that you’ll be able to retire when you want and how you want. You can book a free consultation to learn about your options and what steps you can take to navigate today’s uncertainty. Find a time here.
How to Be More Hopeful and Proactive in a Market Recession
While the economic decision and policy maker’s debate continues to dither around making a market recession “official,” everyday Americans are already dealing with the reality of higher prices, slowing growth, and a bear market.
This is especially true for those near retirement. During this turbulence, you might be wondering:
Since economic activity is cyclical and recessions are inevitable in our lives, there are some tried and true ways to beat market anxiety and even make some money.
Let’s dive into how you can better prepare for and navigate a recession.
Preparing for Market Recessions
Like an ocean, the economy moves in waves. As much as we all want a steady, upward trajectory to universal growth and progress, it’s normal to see bear and bull markets. Bull markets are generally favorable and accompanied by an appreciation of value, and bear markets are the opposite, with a general depreciation.
Take a look at this historical view of the market. On average, bear markets last 9 months. The most recent recession caused by COVID only lasted 2 months, while the 2007-2008 financial crisis dragged on for 18 months. Here’s the silver lining: bull markets usually hang around for about 4 years.
Recessions only feel like they last forever, but bull markets have a much longer shelf life.
Click on the chart to learn more about each recession. Image credit: Dimensional
As an investor, it doesn’t benefit you to see a bull market as “good” and a bear market as “bad.” What these designators should do is help you adjust and determine how to handle your investments.
Investing Through Recessions
The market reacts to many triggers, one of which is how much faith people have in the economy. When the market is up, people believe it will grow and want to invest. When the market is down, our instinct is human: cut and run!
But the data encourages investors to keep their money in the market.
Of the 15 recessions in the last 100 years, 11 showed positive returns as soon as 18 months after the recession started.
What goes down doesn’t stay down. In fact, it rebounds stronger.
Since 1929, the market has yielded an average 10% return. Not every stock will hit that average every year, but over time, you’ll earn more by keeping your money in the market.
Need a little more proof?
J.P. Morgan looked at the 10 best days in the market over the last decade. Can you guess when they were? The day after some of the biggest losses.
One reason this happens is that investors see an opportunity to buy when the prices drop. If you’re one of the investors who hold on even when the market slumps, you’ll likely see sharp gains not long after.
When It Comes To The Market, Don’t Trust Your Gut.
It’s hard to be a bystander watching your investments lose money and unable to do anything about it. Loss of control can trick us into thinking that by taking action, we can soften the blow.
But this idea makes us fall into the trap of believing that we can time the market.
Market timing is a fool’s errand—even professional investors and analysts get it wrong. Why? Because to properly time the market, you must do so twice: when you sell and when you buy.
If you sell at the wrong time, you undercut your net gains. If you buy at the wrong time, you could end up paying far more than you had to per share.
When the markets are down, resist the temptation to try and time the market. As we’ve witnessed from the historical data above, the market favors the long-term. So most people benefit from sticking through the lows to fully enjoy the highs.
But how do you beat the urge to guesstimate with your money? Try some of these techniques:
Turning Recessions Into Opportunities
Any bump can be discouraging when you’re getting closer to retirement because you don’t have much time to recover what you’ve lost. In that case, staying the course may not be enough to make sure you meet your retirement goals.
But recessions can also be nesting grounds for opportunity. Here are some ways to reframe your loss with savings and gains.
Consider Roth Conversions
Converting (all or a portion of) your retirement funds, such as a 401(k) or traditional IRA, into a Roth IRA can help you save money on your tax bill long-term.
Roth conversions can benefit high earners whose income exceeds the thresholds to directly contribute to a Roth IRA. The goal is to build up tax-free income in retirement. Doing so gives you more flexibility over your spending, tax bracket, and wealth transfer goals.
But it’s not without its downsides. You must pay taxes on the conversion in the year you make it. Plus, if it’s a new Roth IRA, the money has to sit for five years before you can withdraw the earnings tax-free. This strategy carries distinct pros and cons, so talk with your advisor and tax professional first.
Tax Loss Harvesting and Rebalancing
You can reduce your tax bill by selling some stocks (or funds) at a loss to balance out a gain from another profitable stock. Think of it as pruning your investments.
Say you have one stock that’s consistently underperforming (a couple of quarters or so). It might make sense to take the loss and sell that stock to offset other gains or to realign your asset allocation with your risk tolerance.
Recessions are great at spotlighting market-resistant stocks and others that aren’t as stalwart. It may be beneficial to sell the ones that look less able to weather the storm.
Personal Risk Tolerance and Asset Allocation Evaluation
How you allocate your assets is personal and will change with age and income, so be sure to shift them to fit your goals and capture earning opportunities. Ask yourself:
Am I on track to retire when I want?
Are my retirement accounts sufficient for my lifestyle?
Can I maintain my assets when I retire?
It’s also essential to know how much risk your assets can handle. This isn’t just how much you’re willing to lose, but how much you can lose and still meet your financial targets.
Diversify Your Portfolio
This old phrase is a classic for a reason: don’t put all your eggs in one basket. Part of being financially flexible means having a diversified portfolio.
As you move closer to retirement, you’ll likely require a different mix of equities and fixed income. It’s important to teeter the line between preserving your fixed income and investing for long-term growth.
The Moral of This Story: Ask for Help
Recessions are inevitable and unpredictable, but they don’t have to cripple your investments. You can take proactive steps to protect your money and even find opportunities to make money. By being vigilant, you can ensure you will have enough money to support yourself throughout your life regardless of the market.
At Metanoia, we’re focused on relieving the stress of money management, so you know that you’ll be able to retire when you want and how you want. You can book a free consultation to learn about your options and what steps you can take to navigate today’s uncertainty. Find a time here.
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