“Markets are flashing deep red as investors worry about the health of the economy”
– CNN Business
“S&P and Dow Slide as Evidence of Global Slowdown Mounts”
– The New York Times
“Stocks Drop on Worries About Growth”
– The Wall Street Journal

The markets hit turbulence this week, with the Dow dropping almost 500 points on Wednesday, October 2.¹  Since recent reports have stoked new fears of a coming recession, we decided to write down our thoughts about what’s happening and why.

For over a year now, economists have fretted about the possibility of a recession. The amount of evidence for one has waxed and waned, as good news and bad have jockeyed for attention. But recently, the signs in favor of a coming recession have started to light up in neon.

Before we get into that, though, it’s useful to remember what a recession actually is – and what it isn’t. Since the media tends to report every bit of news with breathless urgency, it’s easy to let the word “recession” transform into a scary, supernatural bogeyman come to gobble up our economy. But what is a recession, really?

Economists define a recession in different ways, but here’s the simplest way to look at it:

A recession is a significant decline in economic activity over an extended period of time.²

Let’s break that down with a little Recession 101.

When economists refer to economic activity, they usually mean a country’s gross domestic product, or GDP. This is a measure of the value of all goods and services a country produces every year. When a nation produces less, or when the value of what it produces drops, so too does the GDP. With that drop often comes a drop in employment, wages, corporate profits – and stock prices. As a result, consumers tend to spend less, which means less business is being done, which means less economic activity is happening. In other words, everything tends to slow down. Spending, lending, selling, making, building, investing. If this goes on for too long – usually at least two consecutive quarters – we’re in a recession. Make sense?

The tricky thing about recessions is that it’s almost impossible to know when they’ll occur until we’re already in one. After all, GDP is a measure of what has been produced, not what will be produced. That’s why we tend to get a lot of false alarms when it looks like a recession may happen – and little warning when one does happen.

So. That’s what a recession is. But why are experts worried about one now?

First, it has been a long time since the last recession. In fact, it’s been over a decade! Since then, we’ve enjoyed one of the longest bull markets in history. Since the economy tends to move in cycles – a period of growth, followed by a period of stagnation, followed by a decline, rinse and repeat – many analysts have felt we’re long overdue for the next one.

More important is the preponderance of data that suggests the economy is already slowing down. For example, on Tuesday, October 1, a new report showed that American manufacturing had slowed down for the second month in a row, dropping to its lowest level since 2009.¹ Other reports suggest the economy is adding far fewer jobs than in previous years. Combined with volatility in bonds, trade war uncertainty, and slower growth across the globe, and you can see why the horizon looks stormy.

That said, we’ve heard these tunes before. While parts of the economy are slowing, that doesn’t guarantee a recession is coming next month, next quarter, or even next year. Consumer spending – perhaps the single biggest driver of the economy – has remained strong all year, and the unemployment rate remains very low.

When it comes to fears of a recession, none of these signs are catastrophic on their own. All these smaller issues just seem to be piling up on top of each other, enough to make everyone sit up and take notice. Here’s how I look at it. Imagine you’ve had a very nice, reliable car for a long time. It’s been strong, steady, and always gets you where you want to go.

Recently, though, you’ve noticed that the miles on your car are starting to show a bit. Your odometer is now over 100,000, a reminder that you’ve had your car for a long time. Furthermore, little problems are starting to pop up. That check engine light keeps coming on, even though you’ve had a mechanic look at it. The engine makes a funny noise whenever you turn the ignition, and is it just you, or are your brakes less responsive than usual?

None of these problems, on their own, would make you think your car is anything less than reliable. But put them all together…

That’s where we’re at with the economy. We may yet be able to wring a few more family trips out of it – but it’s also time to start preparing for when it inevitably breaks down.

The effects of a recession

For the sake of discussion, though, let’s say a recession is going to happen soon. What does that mean? How long do recessions last? And how bad do they get? Every recession is different, but it’s important to remember that we’re not talking about another Great Depression here, or even another 2008-2009. If a recession happens, it doesn’t mean everything will collapse. And if it happens, it certainly won’t catch anyone unawares. Remember, experts have been stressing about this for a while.

Most recessions also tend to be mild in the grand scheme of things. Since 1940, the average recession has lasted just under eleven months, with the shortest being six months and the longest, eighteen.³  On the other hand, make no mistake: Recessions can cause real economic pain for people. A slower economy means less spending, which means less profits, which means lower stock prices, which means lower wages, and worst of all, lower employment. And sometimes, even when a recession is technically over and the markets recover, it can take much longer for employment to get back to normal.

So, if a recession is coming, what should we do to prepare?

Great question! I love the word “prepare.” You know what the definition is, right?

Prepare
verb
To make someone ready or able to do or deal with something.⁴

So, how do we make ourselves ready to deal with a possible recession?

First, even the wealthiest of people should always have enough in emergency savings to cover at least six months’ worth of expenses. This is also a good time to prioritize paying off short-term, high interest debts and evaluating your career security. If you need help with any of these things, please let me know.

Second, we need to remember that even though a recession will have an impact on the markets in the short term, we must always treat your portfolio for what it is: a long-term investment in your long-term future. That means we must not start making panicked decisions because we’re afraid of short-term losses.

That said, if you are nearing the horizon on some of your long-term goals – like retirement, starting a business, building a house, whatever – then it may be prudent to start thinking more conservatively with your investments. After all, no one wants to get knocked off track right before the finish line. With 2019 winding down, it’s time for us to have a complete review of your portfolio and your goals so we can update your financial plan as appropriate.

In other words, if a storm is coming, let’s determine whether you can weather it, or whether it’s time to “batten down the hatches.”  If you have any questions or concerns about the markets, the economy, or a possible recession, please let us know!  We want to address them, so that you’ll continue to feel confident about working towards your goals.

It’s impossible to know whether a recession is coming or not. There are signs for, and there are signs against. But regardless of when the next recession hits, let’s remember that it’s not a scary bogeyman. It’s a slowdown in the economy – and it’s not uncommon. Most importantly, let’s remember that when it comes to the future, prediction is futile…but planning is not.

Have a great October!

¹ “U.S. Stocks Drop on Worries About Growth,” The Wall Street Journal, October 2, 2019. https://www.wsj.com/articles/globalstocks-fall-amid-rising-fears-of-economic-slowdown-11570004904
² “Recession,” Investopedia.com, May 6, 2019. https://www.investopedia.com/terms/r/recession.asp
³ “List of recessions in the United States,” Wikipedia.org, https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#Great_Depression_onward
⁴ “Definition of prepare,” Lexico, https://www.lexico.com/en/definition/prepare

Throughout history people have made inheritance choices that are inexplicable to others. In 1926, Harry Houdini left his magical equipment to his brother, his pulled-from-the-hat rabbits to the children of friends, and a series of random words to his wife. The words were a code that would let her know when he was in touch from the afterlife.

It may sound strange to hear a financial advisor say this but achieving the things you care about most requires more than just money. There are certain habits and behaviors that, while not directly related to finance, can spell the difference between reaching your goals or not. In our experience, people rarely hear about these things from their financial advisors. We want to share some non-financial lessons we’ve learned. It’s our belief that applying these lessons makes working towards your goals both easier and more rewarding.

So, without further ado, here is:

Things Most Advisors Don’t Tell You #2:

Managing your most precious asset

Do you know what your most precious asset is?
It’s not your house. It’s not your car. It’s not your investment portfolio.
It’s your time.

Benjamin Franklin once said:
If time be of all things the most precious, wasting time must be the greatest prodigality, since lost time is never found again, and what we call time enough, always proves little enough.

You’ve probably seen or heard a lot of fancy terms related to your finances. “Asset management,” for example, or “Investment management.” You get the idea. But just as important is the concept of time management.

The definition of time management is, “The act of planning and exercising control over the amount of time spent on specific activities, especially to increase effectiveness, efficiency, or productivity.” 1 Look at those words again. Planning. Control. Effectiveness. Productivity. All things that can have a big impact on how much money you have to achieve what you want most.

The art of time management is essentially the art of prioritizing your life. It’s the art of recognizing which activities are most important in terms of reaching your goals. Some activities will bring you closer; others will move you further away. Many activities, of course, will have no effect either way.

Let’s call them “A” activities, “B” activities, and “C” activities. “A” brings you closer to your goal, “B” keeps you stationary, and “C” moves you further away.

For example, let’s say one of your most cherished goals is to travel to the country your ancestors came from. “A” activities could include creating a plan for getting there, setting aside money specifically for the trip, or learning that country’s language. “B” activities, meanwhile, could be anything from going to the grocery store, to playing a round of golf once a month, or sleeping.

Some examples of “C” activities? How about buying that new $1,000-version of the phone you already have? Or deciding not to plan, but just wing it, instead? As you can see, “B” and even “C” activities are NOT inherently bad! In many cases, those activities can be fun, rewarding, or even necessary. But when you prioritize “B” activities over “A” activities, or when you spend your time or money mainly on “C” activities, then your most cherished goal will always be a fantasy instead of a reality.

Time management, then, is the process of:
• Determining what you need to do to get where you want to go. (These are your “A” activities.)
• Making those activities be your first priority on a daily, weekly, and monthly basis.
• Filling up the remainder of your time with “B” activities after the “A” activities are done.
• Being very cautious about when you spend time or money on “C” activities.

As you may know, we help people plan for retirement. In our experience, people who don’t practice time management end up planning for retirement this way:
1. First, they dream about what they’d like to do in retirement, and then decide it’ll probably happen “some day.” Then they start thinking about what to do for the weekend.
2. A few months or years later, they read a book or article on retirement planning and think, “This makes sense, I’ll have to get on that sometime.” Then they turn on the TV.
3. Occasionally, they remember to save or invest a portion of their income, between bouts of buying the latest thingamajig that everyone else seems to have.

Then, before they know it, they’re in their sixties, and realize they’re nowhere close to being ready for retirement. The point is, time is an asset. But like all assets – money, property, personal skills – if you fail to manage it properly, it will go to waste and be lost forever. That’s why, when it comes to accomplishing what really matters, time management is just as important as money management.

And that’s something most advisors just don’t bother to tell you.

1 “Time Management,” Wikipedia.org, accessed July 10, 2019. http://en.wikipedia.org/wiki/Time_management