We have heard the word recession so much these days; if you searched for her on Google, you would get more than 239 million results. While it is true that not even economists can agree on whether or not we are in a recession, or if it will arrive if the following is true:
And to complement, we see that some banks in the United States and the world, as is the case with Credit Suisse and Deutsche Bank, have had their setbacks.
Similarly, according to a CNBC report, there is a 61% probability of having a recession this year 2023, so many may be concerned about their investment portfolio. But with all due respect, if you are fearful for your investment portfolio, perhaps there are certain things that you have not been doing so well and that we could do better.
Many people feel that recessions are rare situations that do not occur with some recurrence, but it is good that we remember that they are natural processes and that nobody likes them. But they appear to correct the imbalances that are generated over time in the economy.
As an article in the Harvard Business Review points out to us, the vast majority of us have lived; the recession from 2007 to 2009, as well as the one produced by the pandemic in 2020. So you can say that you have experienced one of the strongest recessions after the Great Depression; in the same way, it experienced one of the most extreme recessions due to the rapidity of the fall that was the case of the pandemic.
But it has been realized that, in both cases, the capital markets, or the stock market returned to the value it had before the recession began and that rather since then, the markets have risen. At its worst, the Standard & Poor’s 500 reached a value of 676 in 2009, at its lowest point in 2020, it reached 2,237 when writing this article. In April 2023, it was at 4,150 (source: Yahoo Finance).
So one of the first lessons, without wanting to make any promise of future returns, is that markets recover over time and that three things can happen:
In times of recession, for those who are clear that the capital market is a tool that allows you to reach your long-term destination, it should be seen rather as an opportunity. Because simply in recession, the assets become cheaper; that is what you are looking for to buy more units when the price is lower.
As technology continues to advance, we have become accustomed to having everything quickly; for example, when I was a kid, if you watched TV, you had to wait for the commercial or advertisement to end to continue watching the show of your choice. Now with Netflix or YouTube, you have So many immediate options that you don’t even have a chance to think about which ones you want to see.
It is there that many people feel that the world of investments should be the same and believe that this is about getting rich quickly, which is fed at the moment with social networks or the stories of someone who became a millionaire by investing in something magical.
But sometimes we forget the words of Sir. John Templeton said:
This implies that although technology has changed and the way to access the market has been democratized, and with any app, you can buy the investment of your choice from your cell phone, there is something that has not changed:
And as Mr. Paul Samuelson said:
All of this that we have discussed sounds extremely logical, but the world of investing isn’t always logical. Because if so, we have already seen it when we saw that the market is going down a lot; you should buy and know that you may have a clearly written Financial Plan to get you to your goals made by a professional like a CERTIFIED FINANCIAL PLANNER™.
But the reality is that we see many investors continue to make the same mistakes when recessions hit.
Because before commenting on these errors, let’s first put in the correct framework that happens in recessions:
According to a report published by Fidelity in 2023, during the last 11 recessions in the United States since 1950, stocks have historically fallen an average of 15% per year and have an average duration of 9 months, with which we could already say that in the case of the fall that the market had during 2022, we would already be above both averages, both by percentage and by time.
Main mistakes of investors in times of economic turbulence:
The first question you should ask yourself is, do you have the financial capacity to invest right now, and the answer is very simple:
Of course, you should not invest; rather, it is time to continue strengthening your finances to invest.
If you rather have managed to cover all these previous points and have idle money in your bank account from a large bank earning an interest rate that does not even reach 0.50% per year while inflation is eating that money and you should seek professional help to invest that money.
Some people tell us with these rising interest rates; we should only have Bonds and banking instruments such as Certificates of Deposit and Money Market funds, right?
And although it is true that in times of recession, what happens is that when rates rise, these instruments give good income, and as we saw previously, the shares tend to fall. It is no less true that, as we have said, you would also like to benefit precisely in the long term from the rise in the value of the shares.
So our suggestion remains the same: having a little of everything is important to enjoy all these benefits. That is why you must have a diversified portfolio with stocks and bonds, this being one of the best protection mechanisms, being able to use index funds or ETFs for them.
Additionally, as we have said, it does not try to predict the perfect moment; it uses the methodology called Dollar Cost Average to go buying continuously over time, with which in those moments that the market falls with the same amount, you will buy more units because they are cheaper. If the market goes up, you will buy less because they are more expensive.
Finally, remember that every year Uncle Sam allows you to save and invest in accounts with tax benefits in the United States, such as 401Ks, and IRAs. If you don’t take advantage of and maximize the amount you can contribute, you lose that quota for the year. Not being a very good business that you lose the possibility of legally saving taxes.
In conclusion, we see that the recession for the investment world is bad if you are not ready to invest, do not have a diversified portfolio, or cannot control your fears.
Note: No comments in this article should be taken as investment advice or advice. Always check with your financial advisor before making a decision—information for educational and informational purposes only.
Founder & CEO Advise Financial
Alonso is a “CERTIFIED FINANCIAL PLANNER™” who is dedicated to increasing the Financial Well-being of nurses, physicians and successful immigrants in Florida and Texas. With more than 20 years of experience in the world of finance, always working for the best interest of his clients, under fiduciary criteria.
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