How I Learned to Stop Worrying and Love Recessions

Okay, maybe love is a strong word and we can stretch this pun on a Stanley Kubrick film title only so far. But while recessions connote fear for most of us, they remain a natural part of the economic cycle—something that’s happened every three to 10 years since forever. I would even argue recessions are necessary. They’re akin to an economic fever: Uncomfortable to live through, yes, but also capitalism’s immune response to the misallocation of capital, fiscal irresponsibility, and investor manias. I encourage you to look at things from a different perspective. While I currently think economic risk is high today in the United States, recessions can just as well mean opportunity:

  • For those of you hoping to buy your first home or refinance your existing mortgage, a recession could bring with it lower home prices and lower interest rates, respectively.
  • Portfolio-wise, not all investment asset classes perform poorly in recessions. When recessions are deflationary, government bonds tend to perform very well. And if the economic downturn is drawn out, the trend-following strategies Hesperian incorporates into its portfolio models can perform well, as they did during the dot-com and 2008 financial crashes.
  • If you are currently conservatively positioned, as many of my clients are, a recession may allow you to invest in riskier assets with higher expected returns at much more attractive prices. This is especially possible if you have an advisor that can give you the nerve to do so when the sky seems to be falling and markets are panicking. At the very least you’ll be able to opportunistically rebalance your portfolio to take some advantage.
  • When Roth conversions are part of your tax plan, your advisor may be able to help you tactically execute them right after a large portfolio drawdown. It lowers the tax owed, but then as long as the portfolio recovers long term, a greater amount of appreciation will be free of tax than if a recession-induced drop in asset values never happened.
  • For workers, if you have a career in the public sector or a secure noncyclical industry or are just very good at what you do, you may have very little risk of losing employment. And even if there is some worry, that’s one of the reasons I recommend everyone hold at least 3-6 months of discretionary expenses in reserve (more for business owners or those with unstable or commission-based careers). We can also plan for further contingencies.
  • For retirees with no more wage income coming in, you can significantly limit your exposure to a recession and accompanying market drawdown by maintaining a target risk level that maximizes your statistical chances of meeting all future cash flows. Only the personalized risk allocation path your Hesperian advisor prepares during the planning process can estimate what this might be at any given point in time. But in general, your portfolio should be at its lowest risk level in the years around retirement age. And most of the time, you can’t take on the same level of investment risk in retirement as you could when you were younger (because your portfolio doesn’t have as much time to recover from a drawdown).
  • A recession may also be the key to resolving our recent inflation issues, at least temporarily. And it could allow the federal government to refinance the debt that’s rolling off over the next year at lower rates, which could help its dire fiscal situation and economy as a whole (which is highly dependent on government spending).
So, recessions are not all bad. With preparation, you can insulate yourself as much as possible and even take advantage of recessionary conditions to improve your financial strength. I’m here to help you do that if we get the chance sooner rather than later. And if we’ve completed the financial planning process, you should already be in a strong position to weather any short-term economic hiccup in the grand scheme of things (or working towards it). If you have lingering concerns, I’m always available to listen and assist you in further shoring up your finances.  

All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation. Any inclusion of third-party data should not be construed as an endorsement by HW of the source of the data and is included solely to expand our clients’ access to independent research and data related to investing and capital markets.

This article includes mentions some of HW’s primary methods of investment analysis: Fundamental and Cyclical analysis.

Fundamental Analysis involves analyzing individual companies and their industry groups, such as a company’s financial statements, details regarding the company’s product line, the experience, and expertise of the company’s management, and the outlook for the company’s industry. The resulting data is used to measure the true value of the company’s stock compared to the current market value. The risk of fundamental analysis is that the information obtained may be incorrect and the analysis may not provide an accurate estimate of earnings, which may be the basis for a stock’s value. If securities prices adjust rapidly to new information, utilizing fundamental analysis may not result in favorable performance.

Cyclical Analysis is a type of technical analysis that involves evaluating leading indicators, recurring price patterns, and trends based upon business cycles. Economic/business cycles may not be predictable and may have many fluctuations between long-term expansions and contractions. The lengths of economic cycles may be difficult to predict with accuracy and therefore the risk of cyclical analysis is the difficulty in predicting economic trends and consequently the changing value of securities that would be affected by these changing trends.

Any indicators or analyses of past market performance shown in this article are hypothetical and do not reflect the performance of any actual client account managed by HW, any past decisions made by HW, nor the total fees and expenses that would have been paid by a Hesperian client account, which include Hesperian’s investment management fee in addition to the operating expenses and fees of the underlying funds and other investments. 

Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products.

Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.

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