Financial Planning During Challenging Times

Gerald D. FaheyMarch 22, 2019

Financial Planning

There is no question you’ve seen or heard the word Recession used in the last year or so and if history is our guide – the future will continue to bring divergent market cycles, including challenging periods such as slowing economic times.  So, the investment and market analysis that you read in a newspaper or see on television forecasting a recession will eventually be right – we just don’t know when they will be right!

According to Merriam Webster, a recession is defined simply as a “period of reduced economic activity”, this is consistent with normal economic cycles we’ve seen throughout history – periods of expansion, periods of zero growth and periods of contraction!  Since most of us are visual learners, it may be easier to understand this graphically below – perhaps illustrating best that all the world’s economies and markets have “been there, done that” – many times before!

Someone recently asked if key components of a solid financial plan change during a Recession or economic slowdown and we thought it might be interesting to consider this question today.

Asset Allocation:  One component to consider especially during an economic decline is the investor’s allocation of stocks, bonds, cash and any other asset class.  Having the right balance of asset classes can provide diversification and mitigate risk from being too heavily invested in one asset class over another.  Based on a history of investment returns, asset allocation is the key component within anyone’s financial plan!

An economic slowdown may be an opportune time to revisit your overall risk tolerance threshold.  If your overall asset allocation has been static for many years and you are now much closer to retirement or another major financial goal, it could certainly be a great time to review your comfort level with risk.  A higher level of investment risk can potentially result in greater volatility in account performance.

We often meet new clients who come to us without realizing the level of additional market risk they are assuming within a portfolio too heavily weighted in stocks or stock-based mutual funds.  We also do not want to let market conditions or economic events be the catalyst for any changes in asset allocation.  In our practice, we discuss asset allocation, risk tolerance, time horizon and cash flow with our clients and prospective clients in detail, because of its importance in the overall planning strategy.

Determining exactly when a market decline or rebound will occur is nearly impossible to pull off and is a risky financial practice – so market timing is not a strategy we advocate.  Some investors might invest even more during periods of market decline, based on a theory of buying when the market is “on sale”.  The best strategy is to invest without assuming too much or too little risk.  This should help avoid the temptation to jump in or out of the market – because you could jump at the wrong time!

Risk Management:  It may be a great time to review your existing insurance policies – property and casualty, auto, umbrella, disability, life, long-term care, medical, plus business and any other types.  “Bundling” your coverage (combining multiple policies with the same carrier) can result in premium savings to help with your budget or could facilitate increased protection for your family with the same amount of premium dollars.

We also encourage a review of all existing insurance coverage to determine if it is still needed or suitable protection to meet a client’s changing needs.  As an example, a married couple who purchased 30-year term life insurance policies on each other many years ago to pay the mortgage and who have paid off the mortgage may no longer need this insurance.

Or, consider the same scenario as above but with permanent life insurance in place instead of term insurance. Maybe there is no longer a need for life insurance to cover debt on the property but there is a need for protection from long-term care expenses?  If done properly, this couple could possibly execute a tax-free exchange of one policy for another, utilizing the cash value in the permanent policy to purchase another permanent policy with a long-term care insurance rider to pay health care expenses.

Savings/Emergency Funds:  It might be prudent to consider (at least temporarily) a slightly larger balance in your savings accounts or emergency funds?  Look at your expenses and calculate how many months of bills you could pay without dipping into longer term investments such as stocks, bonds, mutual funds, coins or real estate?  In times of an economic slowdown, especially if you think your employment could be at risk, added protection could come from bolstering savings account balances.

A common recommendation in a financial plan is to have 3 to 6 months of living expenses tucked away in a bank account.  During a Recession, it might make sense to extend that out to 6 to 12 months.  If you were thinking of paying off a mortgage balance or retiring other significant debt, an economic slowdown might cause you to think twice about this strategy.  Also, with the current tax filing season in mind, paying off your mortgage and losing the interest deduction may not be the optimal tax strategy.

Budget:  We think it is always a best financial practice to look at your budget and to determine how much of it is discretionary and non-discretionary. During an economic slowdown, it may be advisable to reduce discretionary spending, especially if there is a potential market decline.  We also recommend the use of a spread sheet or website designed to track expenses – it is amazing how many families are unaware of their monthly or annual expenses!

Retirement Options:  If one is near or at the age of retirement in a time of economic decline, it may be advisable to postpone retirement or consider transitional part-time work prior to full retirement.  We might advise a client to seek available options for additional earned income prior to accessing any retirement and investment accounts, or pension and Social Security benefits.

At HFA, we are here to help clients navigate all economic cycles – good and not so good!



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