In this month’s edition of “Money Matters,” Scott talks about how to manage your money during a recession and tactics you can implement to help safeguard your finances.

Financial Preparation for a Recession: Issues to Consider

The charts below detail additional financial issues to consider during a recession (click images to enlarge). If you have questions about your finances and how a recession may affect your financial future, please feel free to contact me to discuss your options.

Money Matter: Managing Your Money During a Recession Transcript

0:00:00.2 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He's worked with many individuals and taught retirement planning and wealth management strategies to hundreds of financial professionals, and he's joining us now by phone. Welcome, Scott.

0:00:25.2 Scott Oeth: Good morning, CJ.

0:00:25.8 CJ: Good morning to you. And our topic today is going to be recessions and our money. So, my question is, when the media and everybody starts talking recession, does it become a self-fulfilling prophecy?

0:00:41.3 SO: Well, yeah, I think it can have that impact, that's for sure. Psychology both with investors and in the markets. We're talking about inflation; we're talking about recessions. If people are worried about prices going higher with inflation, I think that can cause them to buy more and push prices up, and if people are worried about the prospects of recession, it might cause them to get more conservative and scale back on their spending or contract their business, it just safeguards. So, yeah, I think there is a certain element to that for sure.

0:01:17.4 CJ: Okay. So, what should we be thinking about in terms of recession risks?

0:01:22.8 SO: Well, yeah. Scary concept here, it's scary sounding, at least—right in time for the Halloween season—but I think a few things, since we're hearing quite a bit about this, maybe a couple thoughts on what's happening, what has happened in the past in recession periods of what you might want to consider doing about that with, of course, the disclosure, just general thoughts and not specific advice for any particular listener. But as a quick recap. Where we're at CJ is, we're facing high levels of inflation that we haven't seen in decades. So, the Federal Reserve has been trying to keep a lid on inflation to bring that back down because they've known from historical periods, looking at other parts of the world that this can be really problematic for people, this dramatic cost of spending increase.

0:02:08.7 SO: So, what they've been doing is raising interest rates because that makes it more costly to go borrow money and spend, and it makes it more attractive to keep money sitting in the bank. And it's a way to put the brakes on spending, cool the economy. And the Federal Reserve has been talking about—the general thought is looking for a soft landing, cooling inflation, keeping the economy hovering along. A week ago, they raised interest rates another step, but the tone really changed, CJ. They became more dramatic in terms of stopping inflation is job number one, and that's the priority. If a recession happens, it happens, but we got to curb inflation. So, the markets reacted very poorly. No one likes this idea. We've had two very strong back-to-back days recently, but investments did take a pretty good drop immediately following this announcement. So that's kind of where we are at this point.

0:03:01.5 CJ: And what does that mean for us going forward? The thing about all of this that boggles my mind is A, why people think that an economy the size of ours can turn around on a dime. And the taking risks at this time in moving finances or doing something quickly scares me. So, what should we be thinking about?

0:03:34.1 SO: Yeah, great observations. Yeah, I think a few good things to keep in mind. Recessions really are a natural part of the business cycle. Growth and expansion and contraction, that's your recession and a trough and the recovery. And this was taught decades ago when I was in business school. So, we've known this idea for a long time. So, they're part of the natural cycle. I think there's a big part of that to keep in mind is that the good times greatly outweigh the bad times, both in the stock market and investing, as well as in the economy. And we think about recessions, we go back to 1950, the average recession has lasted 10 months and GDP, gross domestic product, has declined by two and a half percent. That's really one of the key trademarks or indicators of recession is contraction of the business cycle.

0:04:24.0 SO: But if we compare that to the good times, it's really just a blip. The average expansionary period is 69 months and GDP growth has gone up almost 25% during that period, so 10 times more than the decline. So, the good times have outweighed the bad. And you mentioned financial assets, stocks, so very important to point out, stocks and investments and financial assets and the economy are two different things. They're closely related, but they are two different things, and investments tend to lead the economy. It's people thinking about where things are headed, and stock returns can be positive during recessions. Some of the strongest rallies we've had, historically, have happened during the late stages of a recession. And in fact, on average, since 1945, there's been 13 recessions. The S&P 500 has actually gained 3.68% on average during those recessions. So, it is something to be concerned about, and I think there's some steps or things for people to consider that we should mention, but the downturns have been small in comparison to the good times.

0:05:31.7 CJ: Okay. So, what should we be thinking about?

0:05:34.6 SO: Yeah, well, so here again some general observations, not specific advice, really suggest people seek out their own professional guidance—a good CFP would be my recommendation—but I think the first thing to think about is if you're not at that point where you're financially independent and you're having to work for a living like all the rest of us... Okay, so job loss is really one of the main risk in recession, but right now, CJ, the job market is very hot. You're commonly hearing that there's two jobs out there for every job seeker at this point. So, I think it makes sense to think about the strength of your job, where you think your role is both your contribution and maybe the financial strength of the company. And maybe it's time to consider a move to a stronger position there. And then there's a number of things you and I have talked about in the past, and you've got these episodes archived on WTIP, I have them on my Scott Oeth blog.

0:06:30.1 SO: But buying ahead, buying essential things that you need around the house ahead, it makes sense to be prepared. Unfortunately, we're seeing the aftermath of the terrible natural disaster with the hurricanes to make sense for that. But it also just makes sense in the event of a downturn in your personal economy, a job loss, or an illness, to have things that you need pre bought, and it's been a great inflation hedge. If you bought those household supplies and they've gone up in cost 10% over the last year, well, it's effectively like you've earned a 10% return on those paper towels and things like tuna, and things like that, that you have at home.

0:07:06.8 SO: So, that's it. A couple of things, really, the financial assets, CJ, you and I have talked about tax law selling, we've talked about ROTH IRA conversions and last month I mentioned with rising interest rates, new opportunities in cash holdings, I'd look at all those things. But maybe one big new one just to throw out there, a final thought is to consider the role of dividend-paying stocks in your portfolio so that the value side of the stock market has really outperformed this year compared to growth-focused stocks. And when I say outperformed, I mean they haven't fallen as much, but it's significant, it's a big difference. But historically, dividends have really been a major contributor to portfolio returns during recessions. And dividend-paying stocks where companies are giving you back some of their excess earnings as opposed to the flashy growth stocks which catch the headlines in the good times because they're soaring stock price.

0:08:01.8 SO: But dividends since 1940 have accounted for about 40% of the market's overall return, and we forget that. Over the last five years, where it's all about what's the flashy growth stock, dividends have been important—40% is very significant—and the key thing, CJ, I think is that ratio has increased significantly during periods of high inflation and during periods of recession. So, I'm not saying that's something you should go all in on, but thoughtfully consider the role of dividend stocks in your portfolio. I don't think it's a good time to exit the market, but it might be a time to reposition how you're planted in the market.

0:08:38.7 CJ: Okay, anything else that we should be thinking about in terms of investment or financial planning steps that as we look at the possibility of a recession?

0:08:51.4 SO: Well, we've talked about bonds a few months ago, CJ, and the bonds have taken a historical beating this year with rising interest rates. And that's been tough for a lot of people who hold assets in there, but there again, looking forward from this point, the bond market is completely re-priced, and I think there's a lot of new opportunities emerging and just like talking about dividends contributing the portfolio returns. Interest payments coming off the bond side of the portfolio will be a real thing for the first time in many, many years, and so that's also something to look at. And of course, in consideration with your personal financial plan and your risk tolerances is how you position assets in your retirement account or your IRA or as you're working to build that up is that I view it as an overall re-pricing. And some of the areas that have probably been out of favor, I think will be significant contributors going forward.

0:09:50.9 CJ: Okay, wow, lots to think about as usual, and I appreciate these conversations very much, we'll put it up on our website in the next day or so, and people can listen to it again because there's a lot to think about. Anything else, Scott?

0:10:07.5 SO: Hey, I've really enjoyed the conversation, CJ, and look forward to next month.

0:10:10.7 CJ: Alright, thank you.

0:10:12.0 SO: Thanks a lot.