On an unfortunate day in the fall of 2008, Otis and I made dozens and dozens of difficult phone calls. The day was Oct. 9, which marked the beginning of the Great Recession. Otis was my pug, who was lazily perched on the top of my chair. And I was a financial adviser calling my clients to calm their nerves as the markets tanked. Looking back, I was right about some things I thought and communicated that day, but I definitely missed a really important element, which became abundantly clear as the months passed: The economy was wrecked.
There’s a lot to freak out about right now, if you so choose. There’s the virus, which has cruise passengers holed up at military bases. If your particular vice is worrying about the market, it’s prime season. And if you happen to be a “the sky is falling” economy pessimist, you’re licking your chops.
As a person in the financial industry, I’ve been brainwashed, appropriately or otherwise, to offer relief to people when they express fears of a crashing market. And just like everyone else who has preached, “It always recovers,” I’ve always been right. This is, of course, true for working people who are several years from retirement, less true for the freshly retired. Sequence of returns risk is among the nastiest phrases you’re forced to learn once you’re experiencing it.
Yet when the market hit the skids in the fall of 2008, I neglected to consider the financial devastation many Americans were about to experience in the form of employment instability and general chaos.
As this current period of turmoil arrives, all I can think about is the economy. Yes, like you, I’m concerned about the health and safety of all global citizens, but I’m primarily concerned for the economy that will welcome us on the other side of COVID-19. What will it look like? How many small businesses will close? And how many people will find themselves out of work?
I know those are ugly, open-ended questions. And to be honest, I can’t really decide whether I’m trying to scare you. I know I’m definitely not trying to scare you into taking action on your investments, but if I were trying to raise your concerns, it would be to get you to take a close look at how prepared your financial life is for the next recession.
I won’t be the first person to tell you cash is king in periods like this. But instead of telling you to use the cash to buy the dip with some sort of insincere bravado, I want you to build a giant emergency fund that can prevent you from a desperate act of survival. You see, when times get tough, and some jobs get eliminated, it’s the people who have cash to pay the bills, as opposed to liquidating depleted retirement accounts, who will come out on the other side unscathed.
At the very least, look long and hard at refinancing your mortgage to take advantage of historically low interest rates.
In the last decade, consumer confidence has been sky-high. This means people have harnessed that confidence into consumerism, as always happens. Rarely do Americans harness consumer confidence to create stability. But this is precisely what I need you to do.
Your goal, no matter what your portfolio is doing, is to prepare yourself for a potential economic slowdown. Worst-case scenario is, I’m wrong about timing, and you’ve stabilized your short-term finances. That’s the essence of this whole idea. I’m not worried about your long-term stability, even with 2,000-point-loss days. As painful as this last couple of weeks were, we’re simply back to 2019 levels.
Your short-term stability, or lack thereof, is what will be exposed by an economic slowdown. And if I happen to be right and we’re in the midst of a slowdown, be prepared to be told you should spend money indiscriminately to keep the economy healthy. If you’re comfortable with your level of financial stability, go ahead and support retailers and restaurants. But if you feel another November 2008 would compromise your short-term stability, lock it down.
In times like this, turn your focus to your personal economy. If you’re more than 10 years from retirement, don’t waste a second mourning your portfolio. It will be fine. The real question, as always, is whether a contracting economy will hurt your ability to pay your bills.•
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Dunn is CEO of Hey Money, a subscription-based financial-problem-solving company, and Your Money Line, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.
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