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What to Do With Your Money When a Recession is Imminent

The economy feels uncertain right now. Investor confidence continues to drop and that impacts global equity markets. Overall, investor confidence is down 6.6 points since March, which means investors are feeling a little fearful about how the markets will perform in the near future.

When people feel fearful about the economy, it is natural to second-guess investing more into the market or taking on more risk. But long-term investors try not to let their emotions get the better of them. Instead, they are likely wondering, “What is smart money doing right now?”

Here are some of the top ways objective investors are managing their money with signs of a recession looming:

Background - What is Happening? And What Should Investors Expect?

As a financial advisor, I’m asked all sorts of questions from friends, family, clients, and prospective clients. In times of market volatility, the questions can generally be consolidated down to these three: 

  • Why is the economy on a rollercoaster?
  • What is being repriced and why?
  • How do I properly understand my risk?

The answers to these questions could take pages but simply put the economy is on a rollercoaster right now because of a perfect storm of variables.

Why is the Economy on a Rollercoaster?

Factors that tend to create a rollercoaster-like market include supply and demand issues, investor confidence, wars and conflicts, inflation concerns, government policies, natural disasters, corporate performance, regulation or deregulation, and consumer trust in financial and legal systems. 

For Americans in 2022, our bag is full of many of these factors such as supply and demand issues. Because of supply chain issues, there is increased demand for certain items in low supply artificially driving up prices. Yet, with the Federal Reserve raising interest rates this year to help combat runaway inflation, it creates less demand for stocks. We have the Russia-Ukraine conflict, low investor confidence, and mounting concerns about inflation. 

The market is responding as expected: like a herky-jerky rollercoaster. 

What is Being Repriced and Why?

Part of what is making the market so volatile right now is that the market is efficiently repricing assets that were previously mispriced. When the government pumped trillions of dollars into the economy with COVID relief funds, it helped to create inflation. There was more money supply in the economy than the ability to produce goods and services, especially with worker shortages and supply chain problems. 

The increased demand without the economy’s ability to meet that demand caused prices for assets to skyrocket. Furthermore, interest rate changes cause all other asset prices to change as well. With interest rates increasing to slow the economy, it is causing repricing.

Capital markets are repricing, which is why equities have taken a noticeable nosedive. Fewer dollars are being invested into the stock market (companies), creating less liquidity (working capital) in capital markets. As a result, markets are more sensitive to outside factors, which creates a volatile market environment. 

How Do I Understand My Risk?

One of the biggest challenges for investors right now is knowing whether or not they are taking on too much risk. No matter how many years you have until retirement, it’s never easy watching your investment portfolio lose money.

That being said, if you have twenty or more years until retirement, you can assume more risk than someone who is within five years of retirement. Exactly how much risk is personal.

When I help assess a client’s risk profile, I take into consideration how much they can afford to lose while still remaining on track toward their retirement goals, as well as how much they can emotionally stomach losing on a psychological level. The latter has more to do with a person’s threshold for discomfort, even if projections show they will safely arrive at their needed income in retirement. 

Perhaps the best way to understand your risk is to speak with your financial advisor, see how you are doing, and determine if there are any opportunities you can take advantage of to protect your money and continue to grow it under today’s economic conditions.

4 Things “Smart Money” is Doing Right Now

Everyone wants to know what the “smart money” is doing right now. A recession seems all but imminent. Prices are making everyday life less affordable. New policies have some known and unknown consequences. The view into the future is as foggy as it ever has been, yet it feels different somehow with a multitude of factors I can’t even begin to unpack in a single article. 

But what I DO know is that there are four actions investors can take with their money that makes sense:

  1.  Stick with your plan (barring any major life changes). If you have a long enough time horizon until you need to start taking the required minimum distributions from your retirement plan, keep the long-term investing view you started with. There is usually no need to change up a plan that accounted for market volatility and downturns in the first place.
  2.  Roth conversions and tax-loss harvesting. Now is the time to save on taxes. Start paying taxes on your pre-tax retirement savings through Roth conversions so that you build up your tax-free retirement income. Taxes are more than likely to be higher at retirement than they are right now. Therefore, paying taxes in current years helps save money later.  Similarly, tax loss harvesting is a way investors can sell an underperforming asset at a loss and offset their capital gains tax. In either case, you can realize both long-term and short-term tax savings when you deploy these strategies.
  3.  Look for short-term yield. Bonds and cash alternatives are offering higher rates than we’ve seen in years. Just focus on short-duration bonds to minimize interest-rate risk. Also, long-forgotten in the marketplace, CDs are once again delivering some attractive yields.  Some of these tools offer yields of over 2% within 6 months and over 3% in 12-month offerings. I bonds are especially attractive right now featuring a 9.62% yield as well. 
  4.  Keep investing in equity index funds (they’re on sale). I know this last one may seem counterintuitive with the markets in decline, but that’s exactly what makes now a good time to buy. Equities are going for a song right now as they’re getting repriced. If you are more than ten years away from retirement, you have enough time to buy these assets at a discount and potentially benefit when the markets rebound again. 

At my firm Afton Advisors, we plan for recessions in our long-term investment strategies - no matter their cause - because recessions have happened in the past. We have learned from history that markets decline and recover. Recessions happen and then pass us by.  Market performance is always a statement of a moment in time. No one condition lasts forever. Therefore, we work hard to give clients the confidence they need to make the right choices with their money, no matter the extenuating circumstances.

If you’re not sure if you’re doing everything you can to secure your finances right now, speak to your financial advisor or seek out someone new who can help you navigate your financial life with confidence.