Are We Approaching a Recession? - The Personal Finance Guide
Are We Approaching a Recession The Personal Finance Guide


Amid record daily gains in the Dow Jones Industrial and the S&P 500, there remains fear of a recession. Stories keep circulating about fears of market corrections.

Stocks continue to be in their high range and some experts believe that this is cause for concern. Many compare this to the stock market in early 1999, leading to a huge crash at the turn of the century (Frankel, The Motley Fool).

Some concerns that ail capital markets are trade disputes with China, U.S. 2020 elections, and the coronavirus. These have resulted in drastic market changes and extreme volatility.

Some of these issues are very temporary and may not affect the overall market. Now that the SP500 has gone from 3,325.54 on January 23rd to 3,243.63 on January 27th, there is a perfect opportunity for people to buy.

In addition,

History has shown that it can be a good bet for investors to buy stocks once the World Health Organization declares a global emergency, Ned Davis Research found (Stevens, CNBC).

The economy seems strong enough to keep making gains. Unemployment is low and Trump lowering corporate taxes may bring back even more jobs. Underemployment remains another issue, but there is no doubt that more people will be working. More on that here.

There is always a possibility of a bubble — when stocks are driven beyond their true value — but it seems to be genuine growth.

Regardless, it would be wise to take some precautions until the market slows down a bit. Many people don’t have the funds to withstand a crash and can be wiped out completely. I understand how the volatility of the current market may scare many people. Here are a few things you can do.

For the foreseeable future, it may be wise to cut spending. Try to bring lunch to work, spend less on entertainment, and set aside more income for an emergency.

Minimalistic living doesn’t have to be hard. People can find cheap options for entertainment like going hiking, having picknicks, or renting movies online.

Try to set a budget and spend 50% of your income on rent, home, cars, and utility. Try to allocate 10%-20% to entertainment and 30–40% on savings. It may be hard, but you’ll get used to it and you’ll thank yourself in the long run.

You’ll realize that many of the things you are spending on are pointless. Living on a budget will help you maximize how your income works for you.

It always amazes me how people in this country get such high salaries and are always in debt or struggling to get by. It isn’t the salary they get — its the outrageous spending habits people have.

Think to yourself if you really need that car, tv, or sneakers. Wouldn’t it be much better to invest 30–40% of your income to the point where you don’t have to worry about losing your job or a crash in the stock market?

Let’s say you make $50,000 a year. If you save 40% of that you’ll have 20,000 a year. Let’s say you invest this at 7% returns per year in the S&P 500. You’ll have 21,400 each year set aside. After 5 years you’ll have $107,000.00.

With this money, you can start a business, travel, or quit your job. Withstanding a recession would be child’s play.

If you’re really scared about a market crash but don’t want to lose by putting money in a bank, move some of your income to money market funds. They usually make about 2–3% which is lower than the average market return of 7–8%.

Read my posting on S&P 500 ETFs to learn how to get full market exposure without the risk

Money market funds can be a good idea in a recession because they invest in short term debt like bonds. These are unaffected by a recession. Even though the rates for money market funds sound worse, they can be a lot better than when the market is in a recession.

In my opinion, this is way better than putting your money in a bank where the average interest rate is .09% and the highest rates are about 1.00%. There is no question that when playing it safe, a money market fund is the better option.

The average bear market causes stocks to lose about 30% of their value, and it takes an average of about 22 months before prices recover to their previous highs (Frankel, The Motley Fool).

This proves that you must have an option for storing your money where it won’t be affected by the general market, but will make you more than a bank account.

Don’t sell at the first sign of a market dip. People usually let their emotions control what they do and stocks are no different.

Changes in prices are normal — just because there is a big loss one day, it could signify a temporary loss.

The Next day when stocks are up, you’ll end up losing the value. When stocks are down, as said before, this presents a great buying opportunity. Even if there is a decline, stocks always inevitably go up in the long term.

Moving funds around like previously mentioned is a short term strategy to mitigate losses — but stocks will inevitably rise again if history has any value in this conversation.

Conclusion

A recession may or may not happen. Regardless, you must be able to withstand it and come out stronger at the end. This involves being smart with your budget, using mitigation strategies, and having enough funds to stay in the market.

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