18: What a Recession Means for You and Your Money with Jason Clevlen


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Show Quote

“Buy when there’s blood in the streets, even if the blood is your own.”

-Baron Rothschild


Lake Hills Wealth Management– Reach out to Jack or Jason if you have additional questions or need financial guidance. 

Key Takeaways 

1) Keep your mind right and do not make decisions driven by emotion.

2) Putting money to work now will come out well if you’re a long-term investor.

3) If you have an adequate cash reserve and review your spending plan frequently, you have many opportunities to consider during a recession. 

Show Notes

**Click the timestamp to jump directly to that point in the episode.

[1:15] – What is a recession?

  • A recession is when you have two consecutive quarters of economic decline in the GDP.
  • These things are not confirmed or announced until after the fact.

[2:23]  How long does the average recession last?

  • There’s a wide range when you look at previous recessions. The average duration is about 11 months.
  • What’s happening now qualified as a “black swan”: the unknown unknown.

[5:57]  How does the stock market usually react if there’s talk of a recession or there’s a black swan event?

  • On average the decline is 24.8% during a recession for the S&P 500.
  • We’ve already eclipsed that in a matter of weeks. Things have moved very quickly in this decline.
  • We may have already seen the bottom in this downturn.
  • The market is generally looking six months in advance. As long as the market sees a path toward improvement from where we are today, then it’s likely that those bottoms could hold.
  • Volatility will likely continue for a while.

[9:33]  How long on average does it take for the stock market to finally bottom?

  • The average bottom was reached about 45% of the way through the recession. On average, this is 4-5 months.
  • Remember that just because the recession continues, that does not mean the stock market will continue to fall.
  • The market often bottoms before the economic data catches up.

[13:49]  Once the market bottoms in a recession, what happens typically in the S&P 500?

  • When you see sharp declines, that is usually followed by a pretty sharp rebound once things turn around.
  • The average rally is an increase of 24.2%.
  • A lot will depend on where things go with this outbreak. If things improve faster than expected, the stock market will do well.
  • If the outbreak lasts longer, that will create some short-term pain for the stock market.

Ten Financial Considerations During a Recession

[17:41]  1. Make sure that you have enough liquidity to ride out the storm.

  • As a rule of thumb, six months of expenses in cash would be an adequate cash reserve.

[19:36]  2. Review your spending plan. 

  • If you don’t have enough liquidity, now is the time to look at expenses that can be trimmed from the budget.
  • Ramp up any excess cash flow into your savings.
  • If you position yourself well with steps one and two, then step three is easier.

[20:19]  3. Rebalance your portfolio. 

  • At a minimum, you should rebalance your portfolio every 10% on the downside.
  • You’ll be selling your winners (bonds) and buying more losers (stocks).
  • You’re forcing yourself to sell high and buy low.

[24:39]  4. Put excess money to work. 

  • If you have an outsized amount of cash, you can use this as an opportunity to buy high-quality companies at a low price.
  • The best deals come when it’s the scariest.
  • Putting money to work now will come out well if you’re a long-term investor.

[26:10]  5. Find some deals.

  • Whenever there’s softness in the economy, you will get a better price on big-ticket items.
  • There are opportunities for people who come into downturns prepared.

[27:41]  6. Don’t make decisions based on emotion.

  • You need to buy low, when others are fearful.

[29:18]  7. If you have incentive stock options (ISOs), consider exercising them. 

  • Exercising these options now could trigger less taxes including alternative minimum tax.

[30:33]  8. Refinance your mortgage.

  • There’s an opportunity to refinance your mortgage with historically low-interest rates.
  • Review what your break-even looks like and decide if that’s a good option.
  • If you’re not below 4%, take a look at whether it makes sense to refinance.

[32:19]  9. If you lose your job, roll your retirement plan to your IRA.

  • There will be no tax consequences for doing that if you do a direct rollover.
  • In an IRA, you have more investment options

[34:00]  10. Convert IRAs to Roth IRAs.

  • Speak with your tax advisor or investment professional about this.
  • If you’ve lost money, you can recover those assets in a tax-free Roth IRA.
  • Whatever you convert you have to pay income tax on but this could be smart if you’ll be in a lower income bracket this year.

[35:15]  Hear the tip of the week. 

  • Don’t be driven by emotion. Keep your head right.
  • Practice meditation or have some quiet, reflective time to yourself.
  • Don’t consume too much news.
  • Stay educated but stay positive
  • Usually, the worst-case scenario is not how things turn out.

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