It is not a matter of if, but when. Although employment continues to increase and the economy continues to grow, talks of a recession swirl in the wind. Recently the markets just experienced an important recession indicator, an inverted yield curve between the 2- and 10-year treasury bonds. Additionally, concerns over trade talks and the continued slowing growth of China regularly sway the markets up, down, and sideways.
So, what do you do? Run for the hills and liquidate all your assets? Quite the opposite actually because history shows the more you trade, the worse off you are. According to studies done at the University of California Davis, individual investors who actively trade stocks under perform the market and passive investing strategies by a pretty wide margin. This makes total sense as you look at it deeper though. One reason for this is because the pain of a loss is many times stronger than the pleasure of gains, causing people to act in counterproductive ways. For this very reason the importance of a FINANCIAL PLAN is unparalleled. The market is really the great equalizer, weeding out those without a plan. If you can believe it, the average investor has earned yearly returns of just 2.5% over the past 20 years while the S&P 500 has returned an average of 9.5%.
Don’t let a good economy go to waste. In essence, your best plan against the recession we all know WILL happen is to take advantage of today’s mostly good economy and to prepare for the inevitable bad economy — whenever that occurs. The fact is, barring an unexpected global shock, the growing economy gives you time to plan ahead at least some time into the end of 2019, if not longer.
Lastly, take a tip from Warren Buffett, the 87-year-old investing guru. In his annual letter to Berkshire Hathaway shareholders last year, Warren stated that his company doesn’t carry anywhere near the amount of debt it could afford. Taking on less leverage may limit some potential for larger gains, however, it is well worth it in his mind to sleep better at night.
If you need help shoring up your personal safety net, or evaluating your portfolio to see how it will do in a recession, I would personally be glad to sit down with you and run recessionary stress tests on your portfolio to see where you stand.
You can reach my office direct line at 805-879-4718.