For many of us right out of college, we have never experienced a recession. Economics 101 and news headlines for the past year tells us we are long overdue for a recession. No one knows when the recession will happen, we only know the economy is cyclical and it is coming.
The National Bureau of Economic Research states “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Sounds terrible right? Usually when a recession occurs, we will lose our jobs. People without jobs cannot purchase products, which brings down company profits. This means our retirement investments will suffer. We will likely see our investments reduced by half.
At this point, the government will step in and apply monetary or fiscal policies to stimulate the economy.
In most cases, government assistance will put the economy on the path to recovery. This is great, but it takes time to recover. Below is a chart of the unemployment rate during the 2007 recession, it took nearly 7 years to recover to pre-recession levels.
Below is another chart of the S&P 500, it took 6 years to recover your investments to previous levels. At its lowest point, your investments would lose 55.91% of its value.
There is light at the end of the tunnel, the U.S. economy will eventually recover. For the time being, we have to survive the recession. We can prepare by saving money in an emergency fund. In the case that we lose our job, we should have at least 3 months of living expenses to find another job.
In additional to an emergency fund, most of us will need a support network. We need to mentally prepare ourselves to watch our retirement investments plummet in value. While our net worth decreases everyday, we have to AVOID selling our mutual funds. This is extremely hard for a person to do alone, get support.
During a recession, every time you look at the market it will only stress you out. If you are fortunate to have a job, then consider the market to be on discount. Now is the time to BUY. The market will go up eventually, the U.S. economy is cyclical.
If you do not have a job, do not look at the market. It will only hurt your morale, instead focus on finding a job.
About to retire? Tough luck, if you didn’t plan for it. The recession will likely delay your retirement for a few years. Don’t lose hope, just be prepared for the next one.
If you did plan for retirement then you should have a good amount in bonds, which should give you enough breathing room to retire. Bonds will not lose as much value during a recession and are great for retaining wealth.
- Do keep your job
- Do buy more mutual funds while they are on discount
- Do use your emergency fund
- Do seek emotional support
- Don’t sell your investments
- Don’t retire unless you have planned for the recession
- Don’t look at the market
If you are reading this during a recession, hang in there! The economy will get better.
Happy to chat about recessions below in the comments. If you would like to request a specific topic you want to learn more about, please let me know in the comments section below or email me at firstname.lastname@example.org!
Cover Photo Credit: Daniil Silantev
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