How to Prepare for a Potential Recession

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Intro: Welcome to the Paragon Podcast where we discuss the markets, our strategies, and how to live better today while planning for tomorrow.

Elean: Hello and welcome to the Paragon Podcast. I’m Elean Mendoza, and I’m here with Evan Shorten, the firm’s Founder and Principal.

Evan: Hello, this is Evan and I wanted to thank you for listening in. If you have not had the opportunity to do so, please subscribe to the podcast via Apple Podcast or Stitcher Radio. To stay up to date with all of our content you can visit our website at paragonfinancialpartners.com and sign up for email updates on the homepage. We do not spam and only send relevant updates regarding new content or financial deadlines throughout the year.

Elean: So this year has really started to scare investors. Some of the conversations we have had with clients and other professionals seem to indicate that this year has brought a shift in mindset. To give you an idea, market sell-offs in previous years were followed with more of a buy the dip mentality. This year sell-offs almost seem to reinforce investors’ fears of a recession. Now, while we are not going to go so far as to predict a recession, we do acknowledge that the risk is present and some of the recession indicators may have started to flash a warning. So today, we are going to discuss some of the strategies you can follow to safeguard yourself and even take advantage of a possible recession.

Evan: It’s also important to keep in mind that just because the warning signs are flashing doesn’t mean a recession is a certainty. It’s possible we could see the Federal Reserve initiate quantitative easing and lower rates back to zero in order to alleviate fears and attempt to cushion a possible recession. We could see a trade agreement that could turn sentiment around and possibly reverse some of the growth slowdown around the world; and essentially, there are a lot of other wild card factors at this point. It’s anyone’s guess what actually ends up happening. Of course, with that said, we are here to address the concern.

Elean: So, I think one thing we need to point out first is if we were to go into a recession, no matter what, the media’s mission is going to be focused on shock value and scare tactics. We’ll probably hear phrases like “the end of capitalism,” “the point of no return,” ” the collapse,” and every other end of the world phrase imaginable to generate click bait and views. In other words, managing your emotions and avoiding the end of the world talk is going to be essential. The reality is recessions happen and eventually recessions end. Your goal is to be prepared, not panic, and focus on following whatever plan or strategy you have in place. So, with that out of the way, what are some strategies and preparations individuals can take?

Evan: So, the very first thing you need to ensure is that you have enough cash or liquid assets to get you through six months in a recession, ideally a year, but six months can help you weather most unforeseen events and buy you time to plan for a possible prolonged downturn. If you’re currently working, this is extremely important because in a recession companies will often thin out their workforce. You should plan to have cash on hand to see you through a prolonged period of unemployment and it’s important that your emergency cash or savings is separate from any funds in your retirement accounts. Now, while your IRA, 401(k) or other retirement plans might have more than enough money in them, you don’t want to draw from these assets in an emergency as you may have to pay penalties, state and federal income taxes, and it’s going to hurt that much more if you’re being penalized to cover an emergency.

Elean: A quick thing to keep in mind if you’re currently working. If you hold a lot of company stock or receive a lot of company stock as compensation, you may want to consider reducing some of that position. This can be a bit tricky to do, but you don’t want to find yourself in a position where most of your net worth is tied to your company stock and then that stock declines 50% or more. Even worse, the possibility of your company going out of business. It’s not the most comforting thought, but in 2008 there were a number of major corporations that went out of business or who were bought out for pennies on the dollar.

Evan: Now, if you’re retired, you’ve most likely built up a nice nest egg and have assets already accumulated. In this scenario, you want to focus on maintaining your cash flow. This could mean having more bonds or real estate in your portfolio to make sure income payments continue to flow in your direction. You want to be allocated to safer, more stable, income assets prior to a recession because during the recession many companies may cut or eliminate their dividends; and you don’t want to be solely relying on dividend income for your livelihood when they get cut. If you already built up a sizable amount of wealth then you may want to keep an extra two years of reserves on hand to help with your psychology of money while you adjust to a market downturn or look for potential investment opportunities.

Elean: Now, let’s assume you have a stable income and ideally you’re not at risk of losing your job. You still want to keep cash on hand in order to grow your wealth. Just the thought of a recession creates sell-offs in various assets. If we were to enter an actual recession, many assets are going to be sold off, whether it’s due to capital preservation, investors selling to cover for emergencies, margin calls, or even just because of general fear. Either way, a lot of potential investments may be available to you at fire-sale prices and you want to be able to capitalize on that opportunity. And for the record, I’m not just referring to stocks. Whether you’re interested in investing in real estate, classic cars, farmland, etc.; recessions or times of crises often provide the best opportunities to buy-in at low prices. And while on the topic of acquiring assets or finding investment opportunities, work on improving your credit now.

During recessions, credit often dries up. Banks become unwilling to lend to anyone other than the most qualified of borrowers. Put yourself in the position to be one of the most qualified borrowers. Pay off any debts and carry little to no balances. Open an additional line of credit now while creditors are handing out credit and home equity lines like Halloween candy. And for the record, don’t open any new additional lines of credit if you struggle with spending. This is strictly an offensive move to leverage your investment potential in the future. Have the available credit on hand just in case you find yourself in a position where a bank is unwilling to lend to you for what could potentially be a great investment.

Evan: One last point that is important to get in order is your portfolio and asset allocation. Make sure your asset allocation is in alignment with your risk tolerance and financial goals. If the thought of a potential 35% market decline troubles you, it’s time to reassess and adjust before we run into that situation. It’s okay to get more conservative and take profits after the past decade of market growth we just had. Let me repeat this, it’s okay to take profits. Now along those lines, it’s important to clean up your portfolio. Have you accumulated any positions over time that don’t fit anymore or perhaps did not perform how you wanted them to? If that growth stock you bought a few years ago didn’t actually grow during the bull market, it’s highly unlikely to do so heading into a potential recession. Now’s the time to assess why you own specific investments and decide if they’re compelling enough to continue holding.

If you work with a financial professional, it’s time to give them a call, communicate your concerns, and set up a review meeting to go over any changes in your risk tolerance, to make sure you’re comfortable with your asset allocation and to review the specific investments you’re in. While you’re there, re-do your financial plan and perhaps create a backup plan accounting for a drop in the value of your portfolio or income. Essentially, start planning now so that if we do enter into a recession, you’ll be prepared. And lastly, if you’re just not sure about where to even begin or perhaps thinking about recessions, portfolio rebalances or financial plans seem like a lot of work, don’t hesitate to contact us.

Elean: So, hopefully you can take something helpful from this podcast, or at least it’s given you something to think about. While we can’t predict a recession with any kind of certainty, we can certainly take steps to plan ahead. Just to be clear, we’re not advocating you go out and open 10 credit cards or start dumping all the stocks in your portfolio all willy-nilly. Simply, right now is the time to start having the conversation and to self-analyze your financial position.

With that, we want to thank everyone for tuning in and listening to the podcast. We highly encourage you to subscribe on the Apple Podcast App or Stitcher Radio and visit our website where you can learn more about us, read our content and sign up for email alerts.

Evan: Yes, and again, thank you for listening. Until next time.

Disclaimer: Paragon Financial Partners, Inc. is a registered SEC investment adviser. The broadcast is for informational purposes only and should not be considered as a solicitation or offer to purchase or sell securities. The financial strategies and guidelines discussed here may not be appropriate for everyone as each individual circumstance is unique. Please review all tax information with your tax professional. Please review all legal information with your legal professional. We hope you enjoyed the “Paragon Financial Partners Podcast.” And again, thank you for listening.

Author: Paragon Financial Partners

Paragon Financial Partners, Inc. is a Registered SEC Investment Advisor. The topics discussed herein are for informational purposes only and should not be considered as a solicitation or offer to purchase or sell any securities. The financial strategies and guidelines discussed herein may not be appropriate for everyone as each individual circumstance is unique. Please review all tax information with your tax professional. Please review all legal information with your legal professional. If you have any questions or would like to speak with us, please contact us by phone at (310) 557-1515 or by email at info@paragonfinancialpartners.com.

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