There’s a lot of debate about whether or not we’re in a recession. By the traditional definition-two consecutive quarters of negative GDP growth-we seem to be. But there are some extenuating circumstances that make drawing a conclusion either way more difficult. Whether we are or not, any cyclical economy will experience recessions, which means there’s always one looming somewhere in the future. We can’t predict with certainty when recessions will happen, but since we know they will eventually occur, we need to understand the opportunities they can present.
Recessions: Part of the Economic Cycle
Recessions are almost universally hailed as bad news, which isn’t entirely wrong. However, to the savvy investor, recessions are also rife with possibilities. We need to understand that recessions are inevitable occurrences in cyclical economies. This means they can be anticipated and planned for even though we can’t predict with certainty exactly when they’ll occur.
As recessions are inevitable, so are recoveries from them. Positioning for those recoveries is where opportunities lie. While many instinctively pullback on nearly everything financial in recession, from discretionary spending to saving for retirement, it may be beneficial to ignore those instincts in some cases. Instead of scaling back investment spending, consider using recession-depressed pricing to acquire assets at a discount. Doing so can lead to gains when the economy recovers.
Avoid Recession Pitfalls; Don’t Panic
The first step you should take when the economy is down is to remain calm. Above all, don’t make hasty decisions out of panic because you see the value of your assets dropping! It’s tempting to sell investments that are losing value, but remember that if you do and the market goes back up, you will have locked in your losses. You can’t recover from a loss of value if you get rid of the assets before they recover.
Increase Retirement Contributions
If you’re able, think about increasing contributions to retirement accounts while the economy is in recession. You’ll get more assets for your money during recessions than when the economy is flourishing. That can make a recession a great time to contribute more to accounts like Roth IRAs or escalate catch-up contributions if you’re more than 50 years old.
However, don’t neglect your emergency savings. Should you lose your job in a recession, you want a healthy stockpile of readily-accessible funds to get you through the tough times without draining your retirement accounts.
Another recession opportunity is called tax-loss harvesting. If you need to lower your tax bill and have assets that have taken losses in the recession, you can sell them intentionally to reduce your tax burden. If done properly, you realize the losses for tax purposes while staying invested in the market, and you won’t miss out if the market rises again.
Understand Economic Conditions
It’s important not to wait for an official proclamation that a recession is occurring before you react to recessive conditions. The old saying, “if it walks, looks and quacks like a duck, it’s a duck,” holds true for recessions. Whether or not a recession is officially declared, if the economy and investment prices are down, that might be a good time to put your recession-linked investment plan into action! It’s a good idea to carefully consider current economic conditions and base your financial decisions on observations rather than official labels.
At Asset Preservation Wealth & Tax, we’re helping our clients find ways to insulate themselves from the negative impacts of a recession. We also help position clients to capitalize on the markets once a recession is over. The strategies for weathering a recession can be complex. You should always seek the advice of a trusted financial professional to help keep you on a steady path forward.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.