It’s no secret that we’re experiencing uncertain economic times. While unemployment remains low, inflation is at a record high and increasing. In response, the Federal Reserve has raised interest rates to help slow the rate of inflation. So, everyone is asking the same question: Are we in a recession? And if so, what should we do?
We asked Steve Eiting, David Oliver and Nate Cedarleaf, members of our Private Wealth Management team, these questions, and they offered some helpful insights. Read on to see what they had to say.
What is a recession?
Cedarleaf: A recession is officially defined as two back-to-back quarters of negative GDP (Gross Domestic Product). Based on that definition, the U.S. economy is technically in a recession currently.
Recessions are a normal part of the economic cycle, and we have experienced 11 in the U.S. since World War II. They typically occur after the Federal Reserve begins tightening its fiscal policies by, among other things, raising the Fed Funds Rate.
What are some ways Minster Bank’s customers can prepare themselves to weather the storm financially?
Cedarleaf: First and foremost, I think the best thing clients can do to weather any economic downturn is to have an emergency fund set aside, typically 6-12 months of living expenses.
Oliver: One thing people should do at least annually, no matter what the economy is doing, is looking at their asset allocation (mix of stocks, bonds, and cash). You want to make sure you are not too overweight in any sector. You also want to look at what your stock allocation is like.
Are there any silver linings to the economic situation we’re dealing with now? If so, what?
Eiting: Interest rates are rising, which over the long term is good for savers and investors. Bonds and bond funds have been hit hard by the rising interest rates, but in the longer term, this will help savers. During times when the market is down, we can look to put some cash to use. Buying stocks/funds low has the potential to increase long-term performance.
What are the most important financial matters to prioritize in an economic situation like we’re in now?
Oliver: Again, these are items that we should be working on all the time, not just when the market may be slowing. However, this is a great time to review your asset allocation. Make sure you have an emergency fund and make sure you have enough cash or cash equivalents for the next year or two so that you do not have to sell stocks or bonds when the market is down if you are taking distributions.
Cedarleaf: I think emergency savings is first. Once you have that and a solid budget in place, recessions can be very good times to invest because typically you are buying stocks at a lower price than they had been trading at.
For those who are fearful of losing money in their investments (i.e. retirement), what would you say to calm their fears in the long term?
Eiting: After checking on your asset allocation, you should revisit your time frame. If you are saving for the long term, and you are dollar-cost averaging in your retirement plan, then a down stock market gives you the opportunity to pick up more shares each time they purchase. It is said that people like to buy everything on sale, except the stock market.
Cedarleaf: Split-second decisions based on emotions tend to be the wrong decisions. Many times the best thing you can do is ignore “the noise” and keep investing. If you’re close to retirement, this may not be the best strategy, so working with an advisor you trust can help you work through some of these choices.
Closing Thoughts and Advice
Eiting: When people see their statements and the value of their investments go down, they usually want to do something. Frequently, they are better off continuing with their plan and allowing the markets to recover. Having a long-term financial plan can give you peace of mind and help you achieve your long-term goals.
Let Minster Bank Be Your Financial Advisor
When it comes to managing your assets and investments, you don’t have to go it alone. Having a trusted financial advisor to help walk you through both upswings and downturns in the economy can make a world of difference.