This past year I listened to an inspiring interview with the singer and songwriter, Jewel, who discussed her difficult upbringing in the Alaskan wilderness. Unfortunately, Jewel’s difficult upbringing amplified her sense of hopelessness, and even caused her to consider taking her own life. Fortunately, she was able to overcome those feelings and is in a much happier place today.
Jewel’s inspiration to continue living came to her one day while sitting on her back porch watching the tide go out, and realizing that it always came back in. In that moment, she understood that her feelings of helplessness would pass, and better days would be in her future.
Understanding that the tide always comes back can also be applied to investing. Currently, many people are feeling hopeless with their investments as the decline with stocks and bonds has persisted and the threat of a recession looms large. To address these hopeless feelings and determine when the tide will come back in, it is worth elaborating on both investing strategies and recessions from a historical perspective.
Bear Market Vs. Recession
First, it is important to distinguish the differences between a bear market and a recession as many people may think they are one of the same. A bear market refers to when the stock market has dropped by over 20 percent from its previous high. A recession refers to a temporary, yet significant, economic decline and has nothing to do with how stocks are performing.
What The History of Recessions Tells Us About Today
Historically, we didn’t know we were in recessions until several months after the recessions started. This occurs because the National Bureau of Economic Research is responsible for declaring if we are in a recession by analyzing past data, which enables them to make a judgment. This is in stark contrast to how the stock market works. The stock market tends to move based on what investors believe will happen in the future as opposed to looking at what has happened in the recent past.
In fact, it seems as if stock investors knew we were in recessions well before the recessions actually started, and also knew the recessions were going to end before they actually ended. Historically, stocks have gone down on average 6 to 7 months prior to a recession starting and have tended to improve 6 to 7 months before the recession ended. (Source: Guide to recessions: 9 key things you need to know by Capital Group.) This makes it tricky to time adjustments with your portfolio in response to concerns regarding a recession.
Another reality that diminishes the usefulness of using recessions to determine future stock movements is the short-term nature of the average recession. During the last 70 years, recessions have averaged about 10 months, while the average expansion has lasted 69 months.
(Source: Guide to recessions: 9 key things you need to know by Capital Group.)
The short-term nature of historical recessions coupled with the backwards nature of calling a recession make it difficult to generate predictive value as it applies towards stock investing.
What Should You Do? 3 Steps You Can Take Right Now:
- Step 1: The first step to prepare for a recession is to stay calm when investing. Don’t make bold moves on a gut instinct, as even the best experts in the world have failed miserably at this endeavor.
- Step 2: Maintain adequate exposure to a variety of different categories of stocks and bonds within the portion of your portfolio that is earmarked for retirement.
- Step 3: Bernicke Wealth Management Ltd. believes that the third step should include continuing to emphasize value stocks over growth stocks, while avoiding longer term bonds
Finally, remember the tide will come back in.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risk including loss of principal. No strategy assures success or protects against loss.