What Does the Recession Mean to You if You Don’t Have a Long-Time Horizon?

What Does the Recession Mean to You if You Don’t Have a Long-Time Horizon?
Topics EconomyInvestingRetirement

It seems that each day the financial press inks yet another article about an impending US recession. They’ll cite expert sources and provide a slew of economic data backing up their talking points. Investors with a long-time horizon, one that is beyond 10 years, should be content to ride out any market turbulence as a result of the “R” word. However, for those with short-term goals for their investments, a recession might cause anxiety.

First, it is important to separate the stock market from the economy. The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”[1],[2]

While the NBER definition sounds scary, market performance before, during, and after a defined recessionary period can vary. The final six months of the recession during the Global Financial Crisis, for instance, saw the S&P 500 gain 2%. However, it was down as much as 25% before rallying 36% in that same six-month period.[3]

The takeaway? A recession portends a bumpy ride for markets, but investors shouldn’t try to time the market by anticipating or reacting to it. Instead, even for those who are retired, patience and investment discipline are paramount. Since 1928 the stock market has been positive for 90% of 10-year periods.[4] Even with a shorter time horizon, the odds favor sticking to your plan. Remember–when you exit the markets in hard times, you don’t just have to get the decision to sell correctly. You also have to get the decision to buy correctly and convincing yourself to re-enter the market is often the more difficult of the two.

This isn’t to say that you should bury your head in the sand. If you’re worried about your portfolio’s ability to meet your financial goals, it is prudent to consult with your advisor about how to adjust the risk you are taking. A solid and comprehensive financial plan will define goals, manage risk around those goals, and allow for the flexibility to prioritize those goals at different times to meet them. These types of financial plans should always account for the time horizon of each goal, adjusting risk as the goal approaches and attempting to maximize the probability of meeting that goal.

If you haven’t built this type of dynamic financial plan, it is never a better time to prepare one or to seek some professional help in aligning your investments with your goals.

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