The economy and the stock market have been active so far in 2022. Much of the news has been negative with declines in the market, high inflation and the Federal Reserve increasing their benchmark interest rate. The “R-term,” recession, has been bandied about in the news media more and more recently.
What is a recession?
The official definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Measurements like GDP (gross domestic product), employment, consumer spending, productivity, and business purchases are considered. The imprecise definition leaves room for debate – that we have seen everywhere.
A recession is a slowdown in the economy which effects, in many cases, financial markets. Often, we don’t exactly know we are in a recession until after it has started. But, we can see signs we are near recession territory. We will focus our discussion on what to do now, instead of if, when and blame.
Since the Great Depression, recessions have lasted an average of 11 months. Over that time, there have been 15 recessions. Recessions are part of the normal course of the economy over time.
While we may link the stock market and the economy together, in reality they do not always move together. In fact, the stock market often recovers faster than the economy during recessionary downturns.
What can investors do to make sure they are secure in times of market instability?
While there are no guarantees in investing, there are things you can do to help mitigate your risk during times of market instability.
A long-term investment strategy includes diversification in portfolio asset allocation, active downside protection, and realistic expectations of how holdings will perform in expected environments. Strategies will vary, based upon financial goals, tolerance for risk, and time horizon, but should always include a proactive plan to meet current and near market conditions.
Proper diversification can help mitigate the impact of a market downturn. Diversified portfolios will contain a combination of investments that react differently to different conditions in the markets. Unlike a portfolio that is highly concentrated in one type of investment, some holdings in a diversified portfolio will be impacted less than others during a market downturn. “We can explore using tested approaches that take downside protection to a higher level than usually seen,” says Timothy Canty, Vice President, Investments of the Wedbush Securities San Diego office.
We want to be sure your portfolio is diversified in sync with your situation. A person with a number of years until retirement might have a more aggressive allocation than a person in or nearing retirement. Your time horizon is a key element in formulating an appropriate investing plan.
Budgeting, Liquidity, Spending
Your day-to-day and monthly spending needs are not and should not be tied into your long-term investing accounts. One of the best ways to help ensure that you can keep your long-term investing accounts fully invested is to have money set aside for your short-term spending needs.
Budgeting can help you understand your ongoing spending needs and to track your spending to ensure you are on track. Things happen, this is why most financial experts suggest people have sufficient liquidity to address whatever life throws their way. A standard recommendation is to have 3-6 months’ worth of your normal expenses accessible if the money is needed.
Benefits of a recession
Recessions and the often-accompanying market downturns can offer an opportunity for investors. This is an essential time to be sure your portfolio is properly rebalanced to reflect your long-term strategy. Additionally, this type of market environment can offer the opportunity to buy stocks and other securities that may be undervalued due to the market decline.
In some cases, there can be opportunities for tax-loss harvesting when rebalancing in a taxable account. Losses realized from selling can be used to offset capital gains, or to offset other income.
“Some of the indicators used to define recession point to it beginning in late 2021, so we should also be planning for the recovery that follows every recession,” observes Canty.
Be sure to reach out to your Wedbush advisor to discuss your portfolio during these uncertain times.
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