It is not easy to look at your investments right now… The continual decline in the valuation of your investments is hard to watch, especially if you are approaching or in retirement. Isn’t it interesting that I referenced those approaching or in retirement? Everyone seems concerned no matter the age. But who should be most concerned with a recession? Before I address this, let’s get a better understanding of what a recession is.
How do you know we are in a recession? The technical definition of recession is when there are two consecutive quarters of negative gross domestic product (GDP). Of note, GDP is a measure of the total monetary value of all the finished goods and services produced within the U.S. and is a function of the overall economic health of the U.S. and not the U.S. stock markets in particular. Even though the stock market trends in the same direction as the economy, historically the stock markets have recovered faster than the economy itself.
Of note, there is no way to pinpoint how low the markets will go (i.e. bear market) until the markets show continued improvement in performance. Same for the top of the market – you’ll never be able to guess when the market will peak in performance. That’s why it is not a good idea to time the market. The cycle of selling low and buying high is not productive for generating market returns that will be necessary to ensure you a healthy retirement.
Therefore, if you are 5 or more years from retirement, hang on for the roller coaster ride. The average bear markets last around 11 months and the average market decline during a bear market is 27% while the average bull market lasts over 4 years with an average gain of 167%. If you have extra cash sitting aside, this is an excellent time for you to invest as stocks AND bonds are on sale! Everyone loves a sale! If you do not feel comfortable investing yourself, seek the guidance of a financial planner.
Different story for those approaching or in retirement. This is not a time to be ‘gambling’ in the market or trying to catch up your retirement accounts to ensure a healthy retirement. As if it is not bad enough to be dealing with market risk, inflation risk, and possible tax risk, let’s add sequence of returns risk for those withdrawing money or about to withdraw money from their retirement accounts. At the time you are withdrawing money from your retirement accounts, actual returns at the time of withdrawal are more important than average returns. If those actual returns are negative and for a consecutive period, it could rapidly eat away at your retirement accounts that you have been building up over decades.
Are we headed for a recession? Who knows? Experts are saying yes due to the pace the Federal Reserve is raising interest rates to slow inflation, but they are not expecting it to be a long or particularly deep one thanks to strong consumer demand, low unemployment, large corporate cash holdings, and high savings rates, to name a few key variables. Also, bear in mind that the most recent recession only lasted from February 2020 until April 2020.
The potential for a recession is not only an excellent time to invest excess cash flow but also to engage in the financial planning process. In order to ensure a healthy retirement, why not have enough in savings a few years prior to retirement to ensure you thrive in retirement. In that way, you don’t need to be worried about the roller coaster of a market downturn as you are conservatively invested prior to making withdrawals from your retirement account.
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All information provided by Hartmann CFO, LLC and Healthy in Retirement is intended for informational purposes only. The views expressed are personal opinions and should not be construed as financial or tax advice for your specific situation. Please make sure to do your own research or find a trusted financial professional, tax adviser or attorney before making any financial decision on your own.
Neither Hartmann CFO, LLC, Healthy in Retirement nor its owners make any representations as to the accuracy or suitability of the claims made here. Nor does Hartmann CFO, LLC, Healthy in Retirement, or its owners assume any liability regarding financial results based on the use of information provided here.