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Build Wealth During Recessions, Not Fear

| March 09, 2017
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There are many sayings about fear and the affects it can have on decisions we make.  One says, "there is nothing to fear but fear itself", attributed to Sir Frances Bacon, and used by presidents Franklin D. Roosevelt, and John F. Kennedy in inaugural speeches.  King David wrote extensively on fear and how to overcome it through trust and dependence on God.  We should approach fear of a recession or a stock market correction in the same way.  Additionally, we have history in our rear view mirror to see the affects of recessions and how we can prepare for them.  The following is a list of 10 things that we know to be true so that we don't have to fear as much as we do:

  • To date, we have a 100% track record of recovery after a recession and a market that has gone higher than before the correction.  
  • We see that downturns during recessions are temporary, lasting on average between 12-18 months with average value losses of 35%-40%.  Up markets last an average of about 70 months with cumulative returns of almost 200% over the next ten year following a recession.
  • Recessions are where wealth is truly created.  I'm sure you've heard saying, "buy when there is blood in the streets, sell when there is extreme euphoria in the markets".  Easier said than done. 
  • Recessions take the excesses out of the market to create massive buying and wealth building opportunities.  When do we want to buy? When things are on sale!
  • Retirees, those that have stopped working for a paycheck, may want to have 50%-60% of their money in the stock market and the rest in relatively stable income producing assets so that if there is a recession or correction, we can use cash and income producing assets to swap for the stocks that are being beaten down.
  • Re-balancing to a certain percentage of stocks/income assets is essential to mitigate risk, even in good times.  This allows us to buy low and sell high, helps protect on the downside, and still allows for upside participation.
  • Recessions are natural occurrences in the business cycle so we shouldn't be surprised that these happens.  
  • Recessions don't feel good at the time, however, they are relatively short lived.
  • Behavior is the key to success before, during, and after a recession.  When you hear stories of people loosing their money, you should know that they exhibited bad behavior at the wrong times.
  • No one looses money unless they actually sell into the downturn and it is usually at the absolute worst time.  If one shows patience and good behavior, we just see our statements at a low valuation which, based on history, should be replaced with time.

So, what are the foundational things investors should do to help themselves reduce valuation losses and stick to a solid plan of action:

  • We should do our best to sell into strength and not be tempted to sell into weakness. 
  • Have a solid asset allocation plan that would allow for the exchanging of "low risk" investments like cash and bonds for higher risk investments when the markets are down.  Therefore, we are buying into weakness at much lower prices and accumulating more shares to appreciate faster to help recover the valuation changes we see on paper.
  • Asset allocation represents about 94% of the an investor's returns with the other six percent represented by market timing, and other factors out of our control.  
  • Hire a professional to help them maneuver through rough times in the markets during a recession or some other market shock and to coordinate other financial pieces of their financial lives.  Investment management is only a piece of a financial plan.  Make sure all the pieces of the puzzle (retirement, insurance, estate, business, and taxes) are being coordinated as a whole and not separately. 
  • If there is capacity to add more to the investments with additional savings, then by all means do so to help the portfolio recover faster.
  • Find low cost, highly diversified investment options to help grow your investment portfolio
  • Don't be afraid to invest international and in emerging markets.  Over half of the world's market cap is a compilation of other countries.  
  • We need to, on average, grow our investments at a faster rate than inflation so we must invest in things other than "safe" investments to achieve this objective over time.

Fear is an emotion and in our financial lives, we need to be bold but not careless.  Having an investment plan in place helps us not to be fearful so we can stay the course through solid foundational strategies, experience, and historical perspective.  I hope this has been insightful for you.  I welcome your comments and questions.  To find out if your portfolio is right for you in terms of allocation, risk, and reason, please take a few minutes to message me so that I can help you become a fearless investor.  

If this has been helpful, please forward to your friends and social media groups and follow me on Twitter and LinkedIn.  

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Snow Financial Group, LLC is not affiliated with Kestra IS or Kestra AS.

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