Top 4 things beginning investors should do to prepare for recession

Prepare! (Probably not what you think.) Photo by Noora Alhamadi via Unsplash.

Right now the stock market is strong and there is low unemployment. The economy is in good shape. Some people in the field have been warning that we are due for a recession or bear market in stocks.

What’s a beginning investor to do? There are some facts that you need to know first.

“Fear, greed, and hope have destroyed more portfolio value than any recession or depression we have ever been through.” — James O’Shaughnessy

Stock values are based on companies

Although Beltway pundits like to say differently, the government in the form of the President or Congress doesn’t have much power over the markets. There have been bull (rising) and bear (falling) markets in Democratic and Republican administrations, with Democratic and Republican congresses.

The stock market is based on the actions of businesses, and the relative sentiment of whether things are better or worse.

Having said that, there are some levers that government agencies can pull. The Federal Reserve will help ease credit to boost a struggling economy, or tighten it to constrain inflation, by changing levels of interest rates. It’s independent of the administration, and the same people typically serve under both Democratic and Republican presidents.

Congress can raise or lower taxes. The (mostly) Republican insistence on cutting taxes to stimulate spending has been largely debunked. Cutting taxes on wealthy individuals does not lead to more spending that “trickles down” to the less wealthy. Instead, wealthy people tend to invest their marginal gains back into their portfolios.

Cutting taxes on corporations that already have plenty of cash on hand also does not spur the economy. They simply add more cash to their existing holdings, or use it to buy back some of their stock. Neither of these activities spurs or supports the economy.

A new “tool” that the current occupant of the Oval Office is using is trade war. This could actually have a serious effect on the economy. We haven’t seen a president use this in modern times because it doesn’t work.

Back in the 1950s, American cars were produced in Detroit, and so were the parts. Planes and plane parts were made in southern California and Washington state. However, many of the products we use today are made from materials made in different countries and then assembled in different countries as well.

Foreign companies employ workers here in the US as well. A number of foreign car companies have assembly plants here.

So trying to tax foreign items using tariffs will make everything more expensive for American customers. They will no longer be able to afford buying things, which is bad for the economy.

What the landscape looks like today

The stock market and US economy, as noted above, are strong. The current occupant of the Oval Office inherited this strong economy from his predecessor, who inherited the Great Recession from his predecessor. Obama used his influence to bail out financial companies and encourage easy credit, so he did have some effect on the economy.

The stock market has been on a bull run since 2009. This is the longest bull run in American stock market history. One thing we do know is that eventually it will end.

But how or when? “Experts” have been advising for the past five years or so, if not longer, that we are in imminent danger of a recession. But if you listened to them five years ago and took your money out of the market, you would have missed out on five years of market gains.

The saying on Wall Street is that bulls don’t die of old age.

The market doesn’t just stop rising because it’s been rising for a while. Normally some event will end the bull.

It could be something like another massive terror attack in the US, a confluence of natural disasters (for example, a major earthquake along the San Andreas fault in California and a Category 5 hurricane hitting the East Coast), or a trade war that drives prices of consumer goods up.

Or it could be something entirely different; the point is that no one knows and no one can forecast it. We know it’s coming.

Moves for beginning investors

So if we know at some point that a recession is coming, and the market looks really high right now, should investors stop putting money into stocks? Short answer: probably not. Why?

  1. Cash and bonds are bad investments for long-term goals because inflation eats away at your money. Stocks are good for long-term goals. So if you’re putting money away for retirement, that’s a long-term goal. You can ride out any dips that occur along the way.

If you’re in early retirement and you expect a decade or more left to live, you still need stocks to cover inflation for that period of time. However, you’ll want more of a cash/bond cushion to protect your near-term funds. If you’re in late retirement or on a shorter timeframe, you can probably go ahead with selling stocks.

2. The stock market has always recovered. If the stock market doesn’t come back after the next recession, we’re in more serious trouble than a bad market.

The highest market of all time (up to that point) occurred right before the Great Recession. But if you look at stock prices during that time, compared to today’s, they look cheap. After US stocks had a massive run in 2013 (up over 30% for large company stocks, over 40% for smaller) the market was at an all-time high. But if you look at the prices then… they’re still cheap compared to today.

So, if we get a recession in the next month or two (which I think is unlikely, but you never know) you might feel that you invested at an all-time high. But in ten, or even five, years into the future, those “high” prices that you paid will look cheap.

So should any adjustments be made?

Potentially yes, but to your savings and spending plan, not your portfolio.

  1. Now is a good time to make sure that you’ve paid off any credit card debt…
  2. …and that you have an emergency fund in cash. No credit card debt plus a cash cushion will help you weather downdrafts or company layoffs or other things that occur during a recession.
  3. Look over your budget and see if there are any expenses you can reduce or eliminate. Doing so now will give you extra money to set aside. In addition, you’ll be prepared if you need to cut back during the recession.
  4. Finally, if you are saving for retirement, automate your contributions if you haven’t done so already. When the market is dropping, it’s going to be very hard to write that check or transfer that money. Especially when you know you’re investing in stocks!

Have the automatic deposit and investment done now, so you can leave it alone while the market’s dropping. It will be scary, but remember stocks are cheap during that time.

Summary

Whatever you think about the current government, the economy operates largely outside of it. Midterm elections may change the makeup of government, but this may not have a big effect on the stock market either.

However, given that we know a recession is coming, there are a few things that beginning investors can do to prepare.

Like it? Clap it!

Need more info on beginning investing? Buy the book.

--

--

--

Unlocking The Secrets To Business Achievement With More Life Balance For Women ⎸Speaker ⎸Productivity Queen ⎸Ghostwriter ⎸Author ⎸Pun Lover

Love podcasts or audiobooks? Learn on the go with our new app.

Recommended from Medium

A letter to me, from me

How to Turn a Truck into a House

Save Time, Find Loads Quickly with Trucker Tools’ Broker Advantage — Trucker Tools

Need advice on today’s mortgage rates?

Which home loan is best in current scenario? hdfc, sbi or axis?

Best Bank in Canda | Tangerine Bank

My husband is in the Navy. Are there payday lenders willing to help military?

Impact Investing — Friend or Foe?

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Jennifer Jank

Jennifer Jank

Unlocking The Secrets To Business Achievement With More Life Balance For Women ⎸Speaker ⎸Productivity Queen ⎸Ghostwriter ⎸Author ⎸Pun Lover

More from Medium

Are You Investing Enough?

“I Hope To Retire by Age 40” — Planner Bee Chats With Finance Blogger Sethisfy

2022’s Top 5 Essential Tax Tips

The market is down these days!