The stoic philosopher Marcus Aurelius said, “The art of living is more like wrestling than dancing, in so far as it stands ready against the accidental and the unforeseen, and is not apt to fall.”
In other words, be confident, strong, and ready to pivot. This philosophy on life can also be applied to your finances when dealing with economic uncertainty. We can all agree the levels of uncertainty are very high these days. Uncertainty, however, is a constant condition, only with varying degrees of seriousness and consequences. I’ve learned over my twenty-three years as a financial advisor that no one can predict exactly what will happen next. No one is certain, despite how it may appear. Especially the ones who claim they are certain and can predict markets (for a small fee, of course). When markets are volatile and emotions are high, these predictors run out of the woodwork and into our devices. Taking their advice almost certainly ends up costing much more than the small fee you pay to hear it.
We do our best to share our views on the economy and markets and reference historical data to gain perspective. The information and research we consume, analyze, and share is always based on probabilities and possible scenarios. We create a “base case” for our view and prepare for various outcomes.
For example, we have been writing all year about how the markets have always performed extremely well after a Mid-term election. It has a perfect track record of positive gains. The probability is high, but it is not certain. More recently, we are seeing data points that point to a potential recession emerging some time in late 2023 or early 2024. It is not a guarantee, of course, but a diligent investor should always be prepared for uncertainty, even when times are fairly good.
One may ask, “how do we deal with uncertainty or with a recession?” It’s a good question.
The first step is clearly understanding that there are things we cannot control and must accept. The stock market’s direction on any given day, week, or month is one of them. Despite our opinions or personal views, we also have no direct control over the economy, interest rates, taxes, inflation, etc. We must accept it for what it is and determine how best to navigate through it all.
Just like life, economic and business cycles are constantly changing—some for good and some for bad. Anticipating both favorable and unfavorable scenarios allows you to prepare and determine how you will react ahead of time. It is important to think of these various outcomes periodically, especially when your head is clear and your emotions are in check.
The great news for investors is that there are many more good times of economic prosperity and growth in the United States than there are times of recessions and bear markets. The key to realizing long-term financial success is to make sure when the bad times arrive; you have not put yourself in a position that can cause major havoc. In other words, plan for bad times. If you always assume times will be good, you ignore the reality of normal business cycles. The goal is to get through the bad times unharmed and ready for the next period of expansion that is on the horizon. This does not mean avoiding temporary losses; rather it means do not let temporary losses affect your livelihood in a major way.
Please note I am NOT predicting immediate dark times, and our base case is still optimistic over the next 6-12 months. Instead, I want you positioned to benefit from a good, historical trending stock market, but also prepared if things deteriorate so that you are insulated from serious consequences. We know we can’t control many of the economic forces around us. So, what are some things you can control during recessions and market corrections?
1. Review your expenses - When economic times are good, we tend to spend more. It’s human nature. However, with elevated inflation, potential layoffs, higher cost of borrowing, and higher cost of everything, now is a great time to review your expenses and eliminate some of the fluff. Every good business continuously manages its costs and sees where there is room for cuts; you should too.
2. Have an emergency fund - I can’t stress enough the importance of having 3-6 months of expenses saved in cash. Even better, you can now get paid over 3% to park it there. Reaching into your stock account for extra money from time to time is fine when stock markets are up. But, if you need to raise cash during a bear market, you are forced to sell low. You want to avoid being put in this position by having an adequate amount of cash savings available.
3. Invest in dividend stocks – There are two ways to get paid cash when investing in stocks. The first is to buy low and then sell high. The second is to collect a dividend check from a company that pays one. The first requires a good market, and the second requires you to just hold onto your shares. Remember that cash flow is the oxygen needed to survive difficult times; make sure you have a secure income generating the cash you need to live well.
4. Manage your debt – Excessive debt is the #1 wealth destroyer. It happens time and time again to businesses and families that leverage too much during good times and are not counting on bad times to occur. Perhaps it is time to liquidate some things at higher prices while you still can and get rid of those loans.
Ask yourself if you could still afford the payment if times were tough.
5. Review your asset allocation – Remember that volatility and short-term losses are a packaged deal with long-term investment success. Determine if you are willing to sit through difficult times and stay invested or if you will likely sell your investments if things temporarily go from bad to worse. If so, think about changing the allocation of your investments and ramp up your portfolio with more short-term bonds and CD’s over the next six months. Interest rates are rising, and it is a great time to lock in higher rates that can generate higher cash distributions for you.
I always say that the best way to deal with financial markets is to have either time on your side or reliable income to buy you time. If you have a while before you retire, volatility allows you to buy stocks at temporarily lower prices - make sure you have some cash available to capitalize on it. If you are already retired, a portfolio generating 4-5% of investment income will keep the cash flowing into your bank account and help you continue living your best life.
"Expect the best, plan for the worst, and prepare to be surprised."
- Denis Waitley, "The Psychology of Winning"