What should your investment priorities be?


I love snow — not the powder-lining you might long for on an overpriced ski slope, but the simple, white stuff that blankets the neighborhood. Our neighbors and friends all think I'm crazy, with the possible exception of the five or six families that happen to live on either side of us whose sidewalks get shoveled for no other reason than my exuberance for exercising out in the wondrous white weather. Is it because I spent the first 50 years of my life in areas where the sun always shines? Who knows; but when we moved to Colorado, one of our good friends predicted swift disillusionment: “They who see the stars in it, have never pushed their cars in it.” Well, it has been 11 years and the snow stars still shine brightly for me, as you can see from this picture, taken from our front door.

Whenever my wife, ever the quick-witted one in the household, hears me wax on about the white wonder of winter, she never fails to dryly add that those stars glisten much brighter from within a well-warmed house. That is quite true, of course. I am certain that one's view and how one experiences winter depends very much on the vantage point from which it is viewed — trying to survive a blizzard when your car breaks down versus sipping pina coladas in Cancun or the Bahamas, for example.

It's true for many situations in life: Whether something portends problems or prosperity depends very much on where you are situated. It is especially true for the economy.

The economy goes up and down in cycles, as we know. What fewer people know, however, is how predictable — and short — those cycles typically are. Since World War II (almost 60 years, a period covering most readers' lifetimes), America has had 10 recessions. In recent times, we have had a recession every seven to 10 years, as shown in this chart:

The last recession bottom happened in 2009, and you don't need to be a math major to figure out that it won't be too long before the economy hits the skids again. When that will happen exactly, nobody can tell; but if the past is any indication, it will be soon.

How should you approach this time?

1. Expect it. I don't know about you, but when I was younger, every recession took me by surprise. I know I'm not the only one. The main reason for that is the suddenness and severity of the change. On the other hand, when the economy recovers, it does so slowly and gradually, giving you plenty of warning that it is improving. In fact, when I tell people today that the economy has recovered from the Great Recession (which bottomed out almost six years ago) many still push back and say, “No way!” It's only when I ask them if they are better off today than, say, three years ago that they grudgingly concede that, yes, indeed things have been improving ever so gradually.

That creates an unwritten expectation in us that an economic reversal should also happen slowly and gradually; but, unfortunately, that never happens. It is usually a single day, with a dramatic drop in the Dow, which precipitates mass angst and panic. Within a month, like a virus, that panic spreads to the mass-printing of pink slips, and it's not more than a few short months before Jay Leno starts making recession jokes. (Well, at least when he was on the air, he did.) It is easy to make light of it, but the trauma which befell the 10 million people who lost their homes and/or had to endure the humiliating devastation of filing personal bankruptcy are not funny.

Fortunately, most of the time that pain is avoidable. The first thing to do is simply to expect it and not be rattled or flustered when it happens.

2. Delay all non-essential purchases. The second thing to do is freeze all major purchases, same as you did in the last recession. Few like to admit it, but these days the notion that it is okay to splurge a little (or a lot) has quietly crept into society again. The Great Recession is a fading memory, and neighbors, family and friends are stepping out, so it's only human to wonder if you could join the party. After all, how long should you have to keep sucking it in? Chances are that things are looking better at work than they have in a long time. Perhaps you just got a raise (or at least got previous cuts reinstated) and maybe even the odd bonus. That all adds up to the feeling that now is the perfect time to finally get that new living room set, GoPro camera, or HD television. Hey, I was tempted to get a camera drone for Christmas, myself. They're only $600, after all!

Don't. If you can be patient, you'll be able to pick those up for 30 to 40 percent off in the coming recession, after you find out how your job situation shakes out.

The biggest item of all is a new home. By far the majority of victims of the previous recession were people who bought their homes close to the top of the market and then lost their jobs unexpectedly. (And isn't a job loss always unexpected?) It's not going to be much longer. Just wait.

3. Top off that emergency fund. You may not lose your job — in fact, less than 10 percent of all workers lose their jobs even in the toughest recessions — but you may feel an impact in other ways such as a cut in pay, hours or benefits, canceled vacations or bonuses, or even the extra workload that comes as other coworkers are laid off. You get the picture. A lot has been written about emergency funds here and elsewhere, so there is no need to beat a dead horse necessarily. The point is that, if you have been procrastinating on this issue, it's time to get serious again and increase your savings now.

4. Get rid of debt. To the readers of Get Rich Slowly, this isn't anything new or earth-shattering. However, if by chance you snuck in a little credit card balance, now is the time to take it out and shoot it. If you can swing it, it is also a good time to make a few extra payments on that car, home or student loan. Any payment you make now could give you breathing room when you need it most. It's like putting sandbags around your home to protect against a possible flood.

Why all the frugality at a time when the economy is in the best shape in years? It's so you can …

Keep investing.

1. Don't sell. Most people invest through their 401(k) plans at work or other tax-advantaged opportunities like IRAs. Some have investments in other assets like rental property. In the coming recession, the value of those nest eggs will drop significantly. By now, that should not be a surprise. The important thing is not to panic and sell. According to the Investment Company Institute, this is when most mutual fund investors sell — which is a huge mistake. Mutual fund prices recover pretty much like the chart of the economy above. Just as those values now are much higher than in 2009, they will rise again after the next drop.

The only thing you need to benefit from that next recovery is the determination not to sell. Psychologically, it may be hard not to run for cover when the bombs go off around you. That is why it is valuable to be forewarned, so you can tell yourself ahead of time what to expect and what (not) to do.

But what if you are about to retire? Shouldn't you sell now to lock in your gains? The answer is “No,” and here is why: Even in retirement, you are planning for a horizon longer than 10 years. That means your investments will come back before you need them. Nobody uses their entire retirement fund in a year … or even in five years. You might consider selling a small portion of your portfolio to cover your expenses for the next three to five years — or, better yet, convert your portfolio to dividend-paying stocks and fixed-income securities (or mutual funds which invest in those vehicles). If you live from your dividends (or interest), you don't need to sell hardly any of your investments, and they will recover in the next recovery, just like everyone else's. Will those dividends dry up in a recession? Not necessarily: there is a group of stocks known as Dividend Aristocrats, whose dividends have increased for 25 years or more, without any interruption. Investing in those (or a mutual fund that invests in them) will ensure that your dividends keep growing, even in hard times.

2. Buy. In a recession, prices of everything are at their low point. That makes it the best time to buy … and, therefore, to keep investing. In fact, if you have spare money lying around, that is the time to buy things like rental homes, stocks, mutual funds, etc.

The time to sock away that spare money is now, while things are a lot easier than they will be when you want to buy.

But what about now, while prices are still close to a cyclical high? Should you still keep buying? Surprisingly, the answer is “Yes,” especially if (like most people) you do your investing through an employer-sponsored retirement plan like a 401(k) fund. Every month you don't invest is a lost month, and besides, history tells us that, even when the market falls, it always comes back to a higher level. Likewise, if you invest in something like an IRA, those are limited by calendar years — if you miss a given year's contribution, you can never make it up.

On the other hand, if you are considering buying a rental property, you might want to think twice, as those prices are likely to be significantly lower in the coming recession.

So, in answer to the question in the headline, the priority for investing is to get prepared for the stormy weather that is not too far in the future. Nobody can ever tell for sure when the storm will hit, but being prepared early beats getting caught before your preparation is complete.

You know the saying: “Make hay while the sun shines.” Well, the sun is still shining, but it is late afternoon and the time to make hay might be coming to an end.

What are your investment priorities?

More about...Investing, Planning, Retirement

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JS
JS
5 years ago

I couldn’t agree more on the admonition “don’t sell.” One of the best things to do for any investment environment and for any life stage is to figure out your risk tolerance, put your investments on autopilot, and then sit tight. Figure out your risk tolerance – conservative? aggressive? moderate? whatever – then pick the mix that’s right for you. How much could you lose before you are tempted to sell? Do some research on likely outcomes on different portfolios, and invest so you stop short of the loss potential threshold where you’d want to jump ship. Then as said… Read more »

Wiggles @ FirstYouGetTheMoney
Wiggles @ FirstYouGetTheMoney
5 years ago

If you want to make some money next recession, buy, buy, buy! It’s essentially like walking into a stock store and everything is on clearance! Stocks have proven to be very resilient, so if you can weather the storm then you can make some cash.

Mike
Mike
5 years ago

Anyone who is retiring should have atleast 2 years expenses in cash, thus they will never worry about liquidating assets. Alternatively and/or simultaneously, have an x percent in bonds never hurts, typicall in a recession they don’t get hit as hard and/or if they do get hit, they don’t drop in severity. In combination with this, if you are diversified, you will find atleast some of your assets did not depreciate drastically. So if you need to you can pull from those assets that have not loss value if you need extra cash flow. Finally if you invested enough by… Read more »

Steve | Live Smart Not Hard
Steve | Live Smart Not Hard
5 years ago

As one very bullish on owning rental property, this was a good post to read. Agreed, the deals can be had, just be responsible and think and then re-think through every opportunity.

Jacqueline Ross
Jacqueline Ross
5 years ago

Great read! The chart really conveys the concept of economic/market cycles and puts it into perspective. It takes a lot of self-discipline to create a plan and stick with it. Most people give in to fear and bail, usually because they haven’t prepared properly and end up in a cash crunch (BTW in addition to your personal emergency fund, each rental and investment property should have a reserve fund for exactly the same reason!) IMHO a lot of the recent ‘highs’ we’ve experienced have been essentially artificial, manipulated movement by the government and Wall Street, without the proper fundamentals to… Read more »

Emily @ Simple Cheap Mom
Emily @ Simple Cheap Mom
5 years ago

I’m a millenial, so I’ve been through a few recessions. It feels like the last one is still around and it’s hard to imagine that another will be coming so soon. It’s hard to keep things in perspective some times, especially when you’re young.

William @ Drop Dead Money
William @ Drop Dead Money
5 years ago

Emily, you’re right. That “feeling,” though, can be deceptive, because recoveries typically happen slowly, almost imperceptibly, while crashes happen “loud and fast.” There’s also the bias in the media to not make a big deal out of good news, while bad news gets trumpeted abroad… The evidence that the recovery (such as it is) has been under way for some time is overwhelming, from industry trade groups (autos, airlines, realtors, manufacturers) to those official government statistics many love to distrust. Whether the recovery has hit any one of us personally might be debatable, of course, but I only mention that… Read more »

Dave
Dave
5 years ago

How is this advice any different that what someone should do in 2016? Or what they should have done in 2014? This is all good advice everyone should remember all the time.

William @ Drop Dead Money
William @ Drop Dead Money
5 years ago
Reply to  Dave

Yep, you’re right. Just like all good New Year’s resolutions, it’s one of those things which can’t hurt to hear once a year. There is one difference, though. You never heard me talk about the next recession coming “soon” until now, mainly because from 2010 to 2014 I never thought it was imminent. Nobody knows the future with any certainty, but when you look at history, it would seem we have now entered the window within which the next recession can strike. And it’s just one of those good things to be forewarned and mentally girded to not panic-sell like… Read more »

Ray
Ray
5 years ago

Re paying down debt and the notion that you are piling up sandbags, I’m not sure you are thinking about it the right way. Making extra payments will save you interest and money in the long run, but it is not necessarily the best strategy for preparing to survive a period with no income. Suppose you have an extra $5000 and you are considering applying it to your mortgage. At the same time you are not confident in your job should a recession hit so you need to have enough money to survive without income just in case. If you… Read more »

beatdown
beatdown
5 years ago
Reply to  Ray

Except before paying off debt, he said increase your emergency fund. Everyones situation is unique.

Grace | HMO and PPO
Grace | HMO and PPO
5 years ago

My investment priorities on 2015 and beyond is stocks and mutual funds, doing cost averaging per month for my stocks and lump sum for mutual funds.

Keep on buying stocks shares. The good thing is when the stock prices are low you can buy more shares but when it’s high, only few shares. But the average is great especially if you will do it long term.

Frank Frugal
Frank Frugal
5 years ago

Regional Leader Support Services – NW Chicago William Cowie, I don’t recall how I joined this mailing list, but anyway, I can’t help it. Your advice is terrible. In fact, it could be detrimental to many others. Here are a few quotes: “What fewer people know, however, is how predictable – and short – those cycles typically are. ” If this was so predictable, many people will have avoided those hiccups. You are utterly wrong, and claiming a “big one” is aroudn teh corner could lead people to change their asset allocation. THat is a horrible, terrible, and unfundamented claim.… Read more »

BE Pennypacker
BE Pennypacker
5 years ago

I agree with your premise – use the good times to prepare for the bad.

I would also suggest that now is a good time re-examine your career. If you have a job you don’t necessarily love, now might be a good time to find something else. You know, before unemployment goes back up.

Robert
Robert
5 years ago

With my new-found zeal for saving and reducing spending I would hope I would be better prepared than most if the economy does take a down turn. I’m not loading up on defensive companies, but plan to keep buying great all-around companies that can weather the bad times.

I envy those with cash on the sidelines that can take advantage of drops when they occur.

PJ @ NetWorthNirvana
PJ @ NetWorthNirvana
5 years ago

Love this article – I want to print it out and hang it in the coffee bar at work! So many of my intelligent, capable co-workers and friends have such a blind spot when it comes to investing and I always find it shocking. About this time last year, my boss mentioned that it was a terrible time to be an investor in our company and I replied, “What are you talking about? We’re having a buy-1-get-1-free sale!” He looked at me like I was crazy. Sure enough, I had excellent returns in 2014 while he’s still complaining about how… Read more »

Robert Jacobs
Robert Jacobs
5 years ago

Live on a budget, not just make one.
Make more than you spend
Invest, invest, invest into mutual funds

very simple

Jay
Jay
5 years ago
Reply to  Robert Jacobs

This is better advice than this article. I’d suggest index funds with looooow, low, low fees to be more specific than ‘mutual funds’.

JB @upwardsoftwenty
JB @upwardsoftwenty
5 years ago

Great article, a few coworkers and I were discussing the next drop in our economy. My family has been focusing on paying off debt and increasing savings. In the last recession I was able to purchase two cash flowing properties and our forever home at 50% value. I am actually looking ahead to the next drop and try to increase my retirement plans.

Jay
Jay
5 years ago

Oh my goodness. So the author is predicting that the next recession is just around the corner? So what happens if 2015 is another good, positive year? Then we all missed out by following this advice.

I can’t believe this article was published.

I know my comment won’t be posted, but I hope someone reads this and thinks a bit more before posting articles like this.

Katelyn
Katelyn
5 years ago
Reply to  Jay

I’m wondering what article you and Frank read. What do you think you are missing out on by remembering that 2015 is 6 years after the last low point in the economy, and knowing that recessions tend to hit every 7-10 years? William is recommending that you continue to beef up on your emergency fund, continue investing, and pay down debt. These are things you would want to do in a good year or bad. And he makes a great point about delaying non-essential purchases until the prices crash in the next recession. Sounds like great advice to me. I’m… Read more »

Jay
Jay
5 years ago
Reply to  Katelyn

“When that will happen exactly, nobody can tell; but if the past is any indication, it will be soon.”

Does this author own a crystal ball?

BeSmartRich
BeSmartRich
5 years ago

Amazing Post. Your post really woke me up and made me think about how well I should be prepared for the unforeseeable economic cycles.

BeSmartRich

Nick | Millionaires Giving Money
Nick | Millionaires Giving Money
5 years ago

In the past I’ve made the mistake of selling through fear but I’m determined to ride the storm out this time and continue investing even more when price are depressed. My regret was not investing during 2009 when I was fearful of what was happening to the economy. In some ways I’m looking forward to the recession so I can buy assets for much less than they’re worth. Great articles, thanks for sharing.

Sonja B.
Sonja B.
5 years ago

As a person in the mortgage industry, I can tell you the last recession really started (in that industry) in 2007 and spread to the broader economy in 2008 and bottomed out in 2009. Consider that as you consider the cycle tends to be 7-10 years long.

Beard Better
Beard Better
5 years ago

It sounds like this investing advice could all be summarized in 8 words: do not try to time the market, ever. More than likely you will be wrong, or if you are correct it’s unlikely that your return will be high enough to justify the extra risk. The point about preparing one’s personal savings for the next cycle is an important one, though; economic downturns should not be a surprise to anyone at this point. While we may not be able to predict the reason for the next one, whether it be borderline-criminal negligence, an absurd belief that housing prices… Read more »

Private Equity
Private Equity
5 years ago

The economy will become up and down at any time. In that situation we have to think in a unique way and move in a safe mode. Whatever field, we can invest, but tracking the problem and move in a right direction will gives the best results.

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