The Next Recession: How to Weather the Storm
By • December 17, 2018 0 1026
Since 2008, when the American economy lost $10.2 trillion in wealth, everyone has wanted to know how to create the elusive “recession-proof” portfolio. In particular, folks nearing retirement age — with less time to earn and recover from a downturn — have been eager to learn where they could invest their money so it wouldn’t disappear again in a few years.
From the Great Depression to the Great Recession, economic disasters have become embedded in our cultural subconscious like a recurring nightmare.
As if market volatility weren’t enough to keep us up at night, we’re also fighting against human nature. It seems we’re biologically programmed to make terrible choices when it comes to playing the market. The average investor has earned total returns of just 2.5 percent over the past 20 years, while the S&P 500 has returned an average of 9.5 percent.
While it’s true that we all make financial mistakes, no matter how old and wise we become, we’ll never be able to predict the downturns. Thankfully, though, we can exert control over our emotions, which often have more to do with our returns than the markets themselves.
To keep my clients’ money protected before, during and after a recession, I have them focus on their emergency funds. In your working life, a fund with six months’ worth of living expenses set aside should be enough to float you in the event of a crisis. But once you’re retired, you need to have a full five years’ worth of living expenses in cash, or at least out of the market. Why? The last thing you ever want to do is draw down on your accounts while the market is at a low point — every penny you take out is a double-whammy for your wallet.
To ensure your finances can weather any storm, here’s a rundown on five separate portfolios I would recommend setting aside.
Portfolio A: Determine how much money you need to support your lifestyle for five years, and take those funds out of the market. Put them in a layered CD, a bond portfolio or a fixed annuity.
Portfolio B: This portfolio will be the next one you tap. Since it has at least five years to grow to replace Portfolio A, it can take on some risk, but only assume a 3-percent rate of return.
Portfolio C: If you’re following along, you know that this portfolio will have 10 years before you need it, so you can safely invest a bit more in equities.
Portfolio D: Have faith that you’ll see the markets recover in the 15 years before you need this money, so some risk is acceptable in the first decade.
Portfolio E: Here you’ll leave excess money that you want to grow. Annually, you can move the money over to cash. Remember that cash is a nontaxable liquid asset, and it is your friend.
No matter what plan you follow, remember that your life cannot be put on hold if the market tanks. Anytime your strategy involves removing the temptation to have a fire sale with your assets, or draw down on your accounts during a downturn, it is a very good strategy indeed.
Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an investment advisor representative of Capital Investment Advisors in Georgetown.
