September is one my favorite times of the year. The weather is finally cooling down, kids go back to school, but what I really enjoy the most is football is finally here. Every football coach will tell you that penalties and turnovers will hurt your chances of winning games. Commit a false start, delay of game penalty or have an illegal formation and you are shooting yourself in the foot. These types of penalties ruin your chances to score. Even worse than a penalty is a turnover and it can cost you the game.
Why don’t we take the same approach to investing and your finances? The market has been great and maybe now is the time to reanalyze your strategy. The market moves in cycles and if we have reached the end of greatest bull market in history or getting close, shouldn’t a prudent investor prepare for the risk of recession?
On 14 August 2019 the treasury yield inverted and has done so 3 other days since. This happens when long-term government bonds fall below shorter-term bonds. This significant occurrence has predicated the last seven recessions with an average recession occurring 14 months after the yield curve inverts. There are additional warning signs, the RV industry has predicted the last two recessions and their sales are down 20% this year. Moreover, the price of copper is near a multiyear low, copper is closely followed because of its sensitivity to economic data and is a component in everything from cellphones to refrigerators. Furthermore, manufacturing activity has fallen to its lowest level since 2009.
We can’t predict the future and you are better off investing for the long-term. Taking some prudent steps to prepare is wise and here are some tips to reduce your recession risk:
- Shore up your finances. In the Great Recession the average unemployed person took 29 weeks to find employment. Build up your rainy-day fund from 3-6 months to 6-12 months.
- Start saving but avoid lengthy CDs, whole life policies and annuities. These types of investments will charge you a penalty if you take an early distribution.
- Pay yourself first in order to save not last. Start with a small goal, say 1% and save this amount first and then pay your bills on what’s leftover.
- Pay off debts prerecession and refinance your debts as interest rates fall. Target your high interest debts first. Withdrawing from your IRAs or 401K will cause a potential penalty and potential tax hit.
- Adjust your bonds into more treasury bonds, municipal bonds and investment grade bonds with shorter terms.
- Adjust your stocks into dividend stocks, preferred stocks and blue-chip stocks. Gold and utilities are other areas to consider.
- Rebalance your portfolio. If you were 60% stocks and 40% bonds in 2009 you are probably around 75% stocks and 25% bonds right now.
- Repair your credit now before banks restrict credit and raise rates on those with bad credit.
- Establish credit now if you haven’t. Consider getting a Home Equity Line of Credit or HELOC loan. You don’t have to draw on it now, you can wait till you need it.
- We are living in the Gig Economyso consider establishing a side hustle now.
I hope you find these tips valuable and your football team does well. Moreover, I hope you are prepared for the risk of recession. There isn’t a crystal ball but I’d hate for you to be hit with penalties or a turnover. If you have any questions I’d be happy to chat with you in more detail.
