The events of the last few years, including the pandemic and Russia’s invasion of Ukraine, have created an unparalleled disruption in the global economy. Record-high prices for essential purchases such as fuel and food are just one reason many Americans anticipate a recession. In fact, a recent survey from MagnifyMoney found that 70% of Americans expect a recession, and 68% feel unprepared financially.
The MagnifyMoney survey found that inflation is the biggest concern for Americans, followed by the cost of housing, rising interest rates and the stock market. Financial advisors can help people understand what these signals mean for the broader economy and their personal financial health. The good news is that 89% of respondents are taking actions to prepare for a recession, even if they don’t necessarily know where to begin.
Helping Prepare for a Recession
In this time of uncertainty, it’s imperative that financial advisors communicate regularly and openly with their clients. Even during times of strong performance, communication issues are consistently one of the most common reasons clients change advisors. Clients left in the dark can quickly become concerned about their investment strategy and whether advisors have their best interests in mind.
Now is an important time to review budgeting. With inflation driving up costs, many people are revisiting their cash flow, with MagnifyMoney finding that 62% of respondents have reduced spending. Regardless of income level, clients can benefit from reducing expenses ahead of unexpected circumstances such as a job loss or other emergencies. Growing cash accounts can be useful for eliminating debt and for strategic growth opportunities, such as market dips, to rebalance portfolios.
Debt is a high-level concern for many consumers, and recession worries can increase this anxiety. By analyzing and restructuring debt, a payback strategy can be prioritized while still planning for potential life disruptions. Advisors can offer additional insight and unique opportunities to manage debt that consumers may overlook. For example, U.S. News and World Report notes that in many areas, the residential housing market is still strong, with buyers paying above-market prices for homes. Married couples who are looking to downsize may be able to take advantage of a $500,000 capital gains tax exemption to pay off the mortgage on their next home.
Giving Options and Caring for Clients
U.S. News and World Report also recommends creating a variety of options for each portfolio. Risk can be managed by constructing a partitioned portfolio based on short-, medium- and long-term need. For example, designating one area to growth and another area to capital preservation. This approach can help clients feel more comfortable with stable, long-term investing.
Market swings can be incredibly emotional events for investors still coping with the pandemic. Other external forces or personal issues can further complicate clients’ investment outlook. It’s important for advisors to add a personal touch so clients look to them as sources of advocacy and guidance.