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Thinking About the Next Recession: How Best to Prepare
March 11, 2019
It’s been said that economic expansions don’t die of old age, which has many investors speculating what—or who—will kill what may end up being the longest U.S. economic expansion in over 100 years. In an ideal world, we’d be able to see the next economic downturn coming and prepare our finances accordingly. However, anyone who has lived through a recession knows how unpredictable it can be. As the economist John Kenneth Galbraith famously said, “The only function of economic forecasting is to make astrology look respectable.”
Throughout history, even those closest to the situation haven’t been able to accurately predict an economic downturn. In 2007, for example, neither Ben Bernanke, then-Chairman of the Federal Reserve, nor former U.S. Treasury Secretary Hank Paulson anticipated the magnitude of the subprime mortgage crisis, which ultimately led to the worst U.S. recession since the Great Depression.
Although we can all agree that the current expansion is long, history suggests that trying to forecast its demise is futile. Nevertheless, investors are becoming increasingly nervous, and understandably so. Stock market volatility has spiked in the last few months as every hint of economic weakness creates uncertainty and, as a result, fear. But, as anyone who watches ESPN knows, not every statistic is meaningful, relevant, or even worth talking about.
So, what does all of this mean for you and your investments?
First and foremost, don’t panic.
At times, investors can be motivated by fear and greed. However, allowing either of these emotions to drive decision-making is typically counter-productive to a long-term investment strategy. Numerous studies on investor behavior show that time and again, investors limit their own investment performance and fall short of their financial goals due to poorly-timed investment decisions.
Our investment process is designed to prepare your portfolio for an uncertain future.
While we do not attempt to predict the future, we continually analyze the markets and work to prepare for what may lie ahead. This involves evaluating potential economic environments such as low growth or high inflation periods. We arrive at asset class return forecasts based on how cheap or expensive asset classes like stocks and bonds appear. Whether or not a recession may be looming, we don’t attempt to move into and out of markets to avoid a drop in asset prices. Timing the market requires two decisions—knowing when to get out, and subsequently, knowing when to get back in. Even the most seasoned investors are notoriously unskilled at timing these decisions perfectly. If a downturn occurs, we will continue to remain invested in growth-oriented assets so that our clients don’t miss out on the recovery that inevitably follows. For our clients’ short and intermediate term cash flow goals, we utilize more stable asset classes (like bonds) that should better withstand stock market declines.
We believe more than any other component of the investment process, developing a goals-based financial plan and sticking to it has the greatest impact on long-term investment success.
We define investment success as increasing the probability of meeting your financial goals. When you work with your financial advisor to develop a detailed, goals-based financial plan, your investment strategy is tailored to your risk tolerance, future cash flow obligations, and respective time horizons. Many decisions—from asset allocation to security selection—impact investment performance, though not to the same degree. We strongly believe that starting with a personalized financial plan leads to better outcomes.
Although we do not see a recession on the horizon, the law of averages suggests that we are eventually due for a reversal. Still, we are not focused on forecasting when the next downturn will occur. We believe that sticking to your plan is the best way to achieve your goals even in the face of a possible recession—whenever that may be.
At Ronald Blue Trust, we believe the best defense against any economic or market downturn is a financial plan and a disciplined investment strategy aligned with your goals and future cash flow needs. To speak to a Ronald Blue Trust advisor about your financial plan or to find out more about our investment solutions, please call 800.987.2987 or email
Disclaimer: Ronald Blue Trust obtains historical and other information from a wide variety of publicly available sources. The information and material provided is for informational purposes only and is intended to be educational in nature. We have taken reasonable care and precaution to ensure that the information is fair and accurate, or has been compiled from sources believed to be reliable. Nevertheless, we do not make any representations or warranty, express or implied, as to the accuracy, completeness, or fitness for any purpose or use of the information. The information may not in all cases be current and it is subject to continuous
change. Accordingly, you should not rely on any of the information as authoritative or a substitute for the exercise of your own skill and judgment in making any investment or other decision. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investments, accounting, tax, and legal matters or other matters before taking any action. We shall not be liable for any direct, indirect, or consequential loss arising from any use of or reliance on the information contained here. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Investing involves risk and the value of your investment will fluctuate over time and you may gain or lose money. Past performance of any security, sector or investment style is not necessarily indicative of future results.