The Low-Stress Recession Guide Part 1

I’ve written recently about my goal of keeping my stress low. In the current economic climate, people keep asking me about a recession.

So, what emotion does this bring up? Fear--a cousin of stress!

This is the first of two newsletters about the upcoming recession.

In this newsletter I’ll talk about what a recession is (and isn’t), what can cause a recession, and what you can do about it.

All so that then you can let it go and focus on something that doesn’t stress you out.

I’m saying with certainty there will be a recession. How can I do that?

Here’s the catch—I’m not saying when. I don’t know. No one knows.

We might not have a recession for another 5 years or there could be one in the next six months.

There is always a risk of recession. Perhaps it’s higher now, but the risk is always there.

At least part of what causes a recession is that people stop spending. Here are a bunch of reasons why people sometimes stop spending:

• People are just spooked and worried

• People lose their jobs and have less to spend.

• One external event freaks people out. COVID caused a 2 month recession because so many people were laid off as we tried to figure things out. 9/11 started another.

• Sometimes it’s the financial markets themselves over heating, like in 2008.

• All of the above

• Some of the above.

Note that the stock market tanking isn’t a recession in and of itself. People have to lose their jobs, too. Job loss = pain. (That’s just Bridget talking. The economists get more technical about it, which is detailed here: https://en.wikipedia.org/wiki/Recession)

A little more on spending less: In the early 2000s we had the dot.com bubble bursting, then 9/11 happened right around the same time. Remember George W Bush asking people to spend money? He did that because he didn’t want the recession to get worse than necessary.

When I look at the list of recessions, it looks like, in general, recessions happen every five years. Sometimes we go through a decade when we skip the recession. We had the country’s shortest recession in 2020 due to COVID (2 months) ten years after The Great Recession ended in 2011.

Perhaps we’re due for a recession. Maybe it will happen sooner rather than later.

March jobs numbers were much better than expected, not worse. That means that more people were getting jobs than expected. That’s the opposite of a lot of people losing their jobs. So that says—maybe we won’t have a recession any time soon.

The circular thing is that a lot of people thinking — we’re going to have a recession — can change their spending and trigger, you guessed it — a recession.

The more people believe there is going to be a recession and act accordingly, the more likely there will be a recession. Even if you don’t believe in self-fulfilling prophecies, you probably believe in this one.

That’s why the Consumer Confidence surveys are closely watched. It’s like they survey the collective spending unconscious and try to figure out how people are feeling. When consumer confidence is high, spending is high.

What to do about it?

I asked an admittedly level-headed client how the idea of the stock market tanking felt.

“Well, there’s nothing I can do about it, so what good is stressing out about it?”

Nice attitude.

Here’s what we’re suggesting for actions you can take if you’re concerned about a recession (in other words pretty much regularly):

Check your asset allocation. How much do you have in stocks (for growth) versus bonds (for safety?) Has anything about your life changed so that you should take more or less risk?

Factors we consider include ten things like how much you’re saving, how much you understand about the stock market, if you have adequate hedges against inflation and deflation, and last but not least—how do you feel about it?

If you’ve recently sold a business, are self-employed or think you might get laid off—you could turn your risk down a notch and move some of your portfolio out of stocks and into bonds. Are you getting ready to retire or have you retired? There are two more places where we suggest taking the risk down a notch. That means moving some of your portfolio from stocks into bonds.

When we’ve been looking at people’s asset allocations with them, we talk through a few other things that seem to lower people’s stress levels.

For instance, how much do you have in stocks versus bonds? The bond part of your portfolio shouldn’t be as sensitive to stock market gyrations as your stock. That means if you hear the stock market is down 25% and 50% of your portfolio is in bonds, it’s not as drastic of a downturn as it sounds. In this case, your portfolio might be down 12.5%

You’re probably not going to be happy about that, but also look at--how much do you have in international stocks? International stocks might be behaving differently than US stocks. This fact isn’t nearly as widely reported as the US stock market being down.

So maybe your portfolio isn’t down 25% but is down 8% or 10%. Not that you’re going to be happy, but it’s not down 25%.

Are your emergency funds tidy? We recommend keeping 10-20% of your annual income in emergency funds. Save twice that (20-40% of your annual income) if you:

a. Hear layoffs are coming,

b. Run your own business,

c. Depend on freelancing or commission for a good chunk of your spending money.

Start socking money away in your emergency funds and use it on something else if you don’t need it in a year or two.

If I write the newsletter I intend to for next month, Part two of this newsletter will include

• where you might find opportunities so that you can take advantage of the next recession whenever it hits and

• other tips for how to do what you can, then let it go!

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