Impeachment, Trade War, and Volatility. Are We Headed Into A Recession? How Do You Prepare If So?

Mr. Organic
Oct 7, 2019
3 min read

Updated: Oct 8, 2019

With over 10 years of a bull market, making it the longest one in history, this has been a phenomenal time to invest!

If you took a dart and threw it at a board with the equity sectors of the market for each section... you probably are up (with a possible exception for poorly managed international funds).

Gains are great! But all savvy investors understand that with any level of return you must assume a certain degree of risk.

What do you do when downside risk starts to bear its ugly head?

Hopefully this brief article helps you understand the options at hand for when a recession does occur again.

Emotions Kill Investors

As well as understanding risk, every good investor knows how to make logical decisions about their money rather than emotional ones.

Being too emotionally tied to your money is the main reason why individuals hire professionals to manage their households money, and make sound logical decisions that have nothing to do with emotions.

Let me give you an example:

The market drops %30 tomorrow. What do you do?

Really there are only 3 answers - Sell, Hold, or Buy.

SELL

An emotional investor may choose to sell because they cannot bear the thought of more loss and how that makes them "feel."

Congratulations you potentially chose the worst choice!
This is because if you do not buy back in before the gains are recaptured you accepted the 30% loss.

HOLD

If you chose to hold, good. You are on the right track and will not regret your decision in the years to come.

Emotionally this may seem difficult, but remember emotions kill investors. Typically the market will rebound in about 22 months.
Keep in Mind the definition of recession is: "a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters."This is just a temporary period, it will not last forever! **One important note is that if you are taking distributions/income from your accounts it is imperative to have a plan for where you will take income from during the down turn.**
I often refer to this as a "volatility buffer," or essentially a fixed area that will not be affected by market downturns.
This buffer does not need to be a huge amount, but potentially 2-5 years of income needed.

BUY

This is the best choice (if you have excess cash ready to invest). The biggest problem is that when a recession does hit, most people don't have money.

With this in mind a proactive way to prepare for a market downturn is to always have some portion of cash reserves. Granted if you are going to do the HOLD strategy this not necessary.
Often when a recession comes the best way to invest your excess is via dollar-cost averaging.
For example investing $100,000; $1,000 a week over 100 weeks. This will give you the opportunity to purchase at different prices not knowing when the bottom will come.
While this may be seem simple..when you see your $1,000,000 go to $700,000 the emotionally correct thing is not to pony up another $100,000 to drop into your account. Although this will be the best logical decision you will make!

Reactive vs. Proactive

Everything we have discussed above is a reactive approach. Which is important to understand, but in my opinion being proactive is the best way to live life.

What can you do to prepare your portfolio for the next downturn?

There are many candid answers I could provide to this question (and may do so in a future article), but to properly address pro-activity in regards to your personal financial planning would be impossible.
This is because you are not my client, and I do not understand your personal situation.
Hiring a Trusted Financial Adviser to help you position your self properly for the current market conditions may be the best logical decision for your money.
Drop the emotions and make logical financial choices. Or hire a professional to do so for you.