Now Is The Time to Talk About a Downturn
A goal without a plan is just a wish.
You may think that it might be strange to start talking about an economic downturn now - especially after we have just emerged from one of the fastest recessions in history. However, one of the best times to do so is when markets are behaving normally, investors are feeling bullish, the economy is on the mend, and we have clarity of thought. Better to make an assessment now, instead of when stocks are collapsing and you might be feeling emotionally turbulent. Like owning a car, it’s wise to send it for regular servicing and tune-ups rather than allowing it to fall into a state of disrepair before doing something about it.
Do we know when the next recession or market collapse is going to be? The answer is somewhere between yes and no. No, because like 2020 showed, there is no conceivable way to predict what could happen over the next few weeks or months, let alone the course of a year. On the flip-side, yes, because in investing, we know that some degree of market correction will inevitably occur. Expecting such an outcome will help you become more disciplined and stick to your investment plans through thick and thin.
When the next downturn comes, are you certain that you will be able to hold on to your job? The recession caused by the COVID-19 pandemic could be defined as a watershed one. Who would have thought that booming sectors like tourism and aviation would be so badly hit, and would continue to be affected, with no end in sight? The loss of earning power for those involved is very significant. Reports suggest that leisure travel may not go back to previous levels until at least 2024 - three years from now.
Imagine that you were in a similar situation. You would need a liquid emergency buffer to tide you over whilst you find temporary work. After all, your expenses and mortgage still need to be paid. A rough rule of thumb is to ensure that you have at least 6 to 12 months of living expenses kept away in a savings or current account. For those who are a little more concerned, you can err on the safe side and set aside a bit more.
Think back to the previous market sell-off. Did you feel queasy when you read about how badly the market was performing and that economists had no idea what to expect? Or did you feel calm and collected, eager to put more money into the market? If you fell into the former category and suffered a few sleepless nights, then it is highly possible your portfolio was set up incorrectly and is likely too volatile for you as an individual.
Creating a proper investment plan which clearly states the goals you are investing towards, the expected returns, and risk outcomes, together with a well thought out investment policy statement outlining the assets invested, is an excellent way to ensure you set up a robust long-term investment strategy. It is too late to make last minute changes when you are in the midst of a downturn; both for economic and financial assets. If the idea of creating such a plan and selecting the assets and allocation you require seems too complex, an independent advisor will be able to help.
At the end of the day, there is no surefire way to ‘recession-proof’ your finances. But planning ahead, with outcomes that are achievable, logical, and based on evidence-based investment concepts will ensure that you have a strong foundation to weather any storm ahead.
