Lessons Learned from Previous Recessions
Amid worries of a recession, advisors need to help their clients be prepared and feel ready for whatever happens next. Many lessons can be learned from previous recessions and how investors adapted, including strategies that avoid risk and the best places to put money when planning for the long term.
Revisit Your Clients’ Budgets and Expenses
One of the most common concerns during recessions is job security. A job loss can be difficult to overcome: More than 50% of people suffering layoffs during the Great Recession of 2007-09 still lacked employment in 2010, according to the National Bureau of Economic Research.
Unfortunately, predicting what industries or job roles will be most affected is difficult. Historically, less-educated workers are more vulnerable to layoffs. While that held true during the Great Recession, people with college degrees also suffered, as their 11% job-loss rate is the highest recorded for that group.
Education still correlates with rates of job loss during downturns. A recent survey found that, globally, 16% of workers who have lost a job or business due to the Covid-19 pandemic had a college degree, while more than double, 35%, did not. The survey also found a similar gap when comparing the highest and lowest levels of income distribution.
Revisit your clients’ budgets and limit expenses to focus on essential purchases. Bankrate recommends capping discretionary spending at 30% of net income. If your clients are having financial trouble, have them start small. Cutting back on dining out, canceling nonessential subscription services or downsizing vacation plans are all ways to reduce expenses without making major life changes.
Consider Whether Borrowing Is the Best Decision
In the years before the Great Recession, consumers and institutions alike took advantage of easy credit. This helped form the credit bubble that burst and ushered in the recession. Debt can be especially perilous during a downturn, according to AARP. As Eleanor Blayney, certified financial planner and consumer advocate, explained, “Those monthly payments can lock you into a lifestyle you can’t adjust in bad times — and if you retire today at 65, history shows you’re likely to live through two or three more economic downturns.”
Invest With a Different Perspective
Advisers can help clients not only prepare for recessions but also take advantage of the opportunities that emerge. Investopedia offers several suggestions for your clients to better position themselves. One option is to use dollar-cost averaging when share prices decline. The stock market typically hits bottom well before the end of a recession. Clients can be proactive by increasing their contributions or exercising dollar-cost averaging in a non-qualified investment account.
Another recommendation is to focus on dividends. Consider using mutual funds or exchange-traded funds (ETFs) that specialize in dividend-paying companies. A high dividend payout can be a sign that the company is financially sound enough to persevere through a recession. The dividend payouts can be reinvested or provide a return cushion.
Finally, clients should consider investing in consumer staples. Even during a recession, consumers will spend on these essential items. Historically, these types of companies outperform the S&P 500 during recessionary periods.
Keep Clients Focused on the Future
Remind your clients that markers have recovered from many recessions quite well. In fact, according to Kristin McKenna of Darrow Wealth Management, the S&P 500 generally outperforms as the economy improves. On average for recessions since 1948, the S&P 500 will gain 32% back within a year and 42% after two years, according to an analysis by SunTrust, now Truist. And following the Great Recession, for example, the S&P 500 gained back 68% within a year and 84% the following year.