The business cycle is something that cannot be cheated. It can be extended as our Central Bank has been instrumental in doing.
The current business cycle just celebrated its 101st month in July.
That is the third longest in history so far!
I would hazard to guess that by the time this cycle ends, it will own the number two spot in history at over 106 months and maybe the top spot at over 120 months. Only time will tell!
The typical stock market cycle usually tops (and bottoms) about 6-12 months ahead of the economic cycle, as you can see in the previous diagram.
As many of you found out in the last Great Recession everything from your job security to the market price of your homes can be affected by such recessionary cycles, especially when our Central Banks are creating economic bubbles.
So, to help you in planning for the next such economic downturn, whether it is next month or next year, here are five ways you can prepare for the next downturn:
1. Build an emergency fund
It is prudent to have on hand 3-6 months of living expenses in the bank in cash or on deposit in case you have an emergency need for such funds from such things as job loss, unexpected illness or other emergencies. Now is time to grow that fund if you do not currently have an emergency fund.
A great goal to start with is the simple goal of putting $1,000 in the bank. 7 in 10 Americans have on $1,000 or less in their savings account per a recent survey. So just reaching the $1,000 market would put you in the upper 30% of Americans.
Next, set your sights a little higher and reach for that 3-6 months of living expenses in the bank.
2. Reduce debt levels
When economies go into recession, jobs are lost, raises are forgone, leveraged deals fall apart, and opportunities vanish for much of the country. It is a great time to be in a position where you have the flexibility to accept a pay cut and keep your job or even transition if you must to a lower paying job to continue to support your family. You cannot do this if every dollar you currently earn is consumed by either debt or lifestyle.
A simple way to attack debt is to do a debt snowball!
The debt snowball is where you pay the minimum on all your outstanding debt except for one loan. On this loan, you pay something extra to pay it off as fast as your cash flow will allow. When you succeed in paying off that loan, apply what you were paying on that debt on the next piece of debt to accelerate its repayment until you have paid off all your debt.
Remember, start with the high interest rate consumer debt first and then move to lower rate debt, including your mortgage if you so choose.
3. Adjust your lifestyle
Another simple thing you can do today to prepare for the coming economic recession is to adjust your lifestyle. Now is the time to start budgeting your spending and knocking off any unnecessary expenses that you don’t really need, such as that gym membership you keep planning to use but never do.
If you can better bring your lifestyle into line with your income, you will enhance your ability to weather the storm when the next recession threatens.
4. Develop exit or hedge strategies
Now is a great time to make sure your advisor(s) have your back. When the next recession comes, we speculate the markets could lose one-half or more of their value.
What is his or her exit strategy? If they don’t have one, it is time to find a new advisor.
Although stock markets have proven they can and will recover, the question is do you have the time in your planning to wait on that recovery?
The average investor waited five years to get back to breakeven following the Great Recession. If you are a baby boomer today, you may not have enough time left until you need those funds to wait on such a recovery.
Most Americans are under saved for retirement so moving to a more conservative allocation may not help you in the long run, plus bond yield are at 30 year lows. What are the odds bond yields continue to fall from here?
In our opinion, you need to be willing to trade out of the market when it is in a confirmed bear market. Without the right tools and models, these can be difficult to identify for the average person or adviser.
5. Change your mindset
I hate to say it but economic recessions provide opportunity to those with the cash reserves to take advantage of them. Yes, you are in a way preying on someone else’s poor fortune but chances are they failed to plan ahead like you when they had the chance.
In the last Great Recession fortunes were made by those who purchased marked down equities at the bottom or real estate at distressed prices.
Will you be the victim in the next recession or the victor?
Let me know if you have comments or can think of other creative ways to prepare for the next economic recession.