Financial advisor explains how to prepare for a global recession

It’s hard to watch the news or flip through the financial pages today without seeing the mention of a looming recession triggered by one of the world’s superpowers defaulting on a mountain of debt and dragging the global economy with it. While this event could eventually turn out to be true, seemingly like death, it is almost impossible to predict when the Hooded Man will come to pick you up.

Rather, a more effective strategy would be to consult a qualified financial advisor to explain the best way to weather such a recession if it were to occur. The CEO magazine did her homework this time around by asking financial advisor Helen Baker tough questions about what you need to know about a recession as well as what certain age groups should prioritize during this difficult financial situation.

Beware of the endless apocalyptics

Each circle of friends has one or more. They are the ones who predict the arrival of a crash and will try to scare others into following the same story.

“Don’t believe everything you hear,” says Baker. “There are always people who predict good times or bad and that’s just a forecast, so you never know what’s going to happen.”

She supports this view with the start of the pandemic in March 2020. Global markets were scared and lost about 40% of their value – then rebounded pretty much immediately.

“I don’t think anyone could have expected the return on their investments over the past 12 months, even we as advisors haven’t,” she says.

“Markets and the way they react aren’t necessarily what’s going on in the economy – they’re two different animals. “

Baker says the outrageous returns made during this perceived slowdown are proof that people shouldn’t always believe what they hear.

“In theory you would have thought COVID-19 was all bad, everything is going to collapse, but all the markets have gone up in the world, including stocks and real estate. We are in a whole different world. Markets and the way they react are not necessarily what happens in the economy – they are two different animals.

With fear and negativity being the media’s preferred fuel for recession forecasts, Baker explains that market turmoil is quite normal and should be expected.

“The global financial crisis came and everyone thought it was the end of the world – she survived. COVID-19 has arrived, we thought the world would end again – we survived. These things happen. It is unrealistic to expect our investments and ownership to increase all the time. They all move back and forth.

How much money you should have in the bank

Most people should have cash savings in the bank during an economic downturn, but the question is how much? Like a typical financial advisor, Baker says it all depends on the following:

  • Whether you are working
  • How safe is your job
  • How likely is it that you will lose your job during economic events
  • How much debt you have
  • What are your commitments
  • What other income or investments you have
  • Whether you are totally dependent on your salary

Due to these very diverse factors, it is difficult to give a precise figure of the cash savings for each person.

“In general, I used to advise having about three months of spending in the bank, so it’s your mortgage, your bills, and your spending money. That’s what was reasonable before, ”says Baker.

“But I think after the experience of COVID-19, some industries had big problems, like travel. So you might need six months or more to be safe.

“I talk to my clients about the ‘sleep at night’ factor, so whatever the amount, the real question should be, ‘What is your sleep factor at night? “

“That is, if you lost your job today due to the recession and the markets fell, what would you want from the bank? And for everyone it’s different.

How well you should diversify your assets

Asset diversification is basically investing in different asset classes rather than having all of your eggs in one basket (or all of your savings in the bank). Baker strongly recommends diversifying assets across industries, countries, and company size to minimize the personal financial impact of economic downturns.

“I am a strong believer in diversification. Many will just invest in the top 10 stocks, but that’s just Australia, and we only have 2% of the global market. If you think of industries like healthcare and communications, where do they all reside? Abroad.

“We must therefore think of a range of assets. One of the reasons people try to choose where to invest is because they are trying to guess who will be the next winner. If you had the money on the trip, it would have collapsed significantly. If you spread it over a range of investments and industries, you are protecting your portfolio as some may go up and some may fall, and losses in one area are compensated for.

“It’s about treating it as an investment that is different from gambling, although often times people treat the investment as if they were gambling.”

Baker’s recommendations for asset classes include:

  • Local markets
  • International markets
  • Emerging Markets
  • Fixed interest or bonds
  • Cash
  • Real estate and property
  • Environmental, social and governance values

These are mainly the key areas seen in the standard retirement investment fund.

How long do recessions last

Weathering the storm is a given to most during a recession. While preparation will distinguish winners from losers, the length of an economic recession is also a crucial factor. However, determining this duration is not straightforward.

“If you look at the GFC, it took a year and a half for the markets to come back to where they were,” says Baker.

“They’re talking about a double-dip recession, which is two consecutive quarters of economic contraction, but it’s going to be different for different countries. During GFC, much of the northern hemisphere experienced recessions, but countries like Australia did not.

“Recessions don’t have to be global, which is why you want to diversify. While some countries are not doing well, others could be.

Recession tips for young professionals

Assuming that this group has limited financial commitments, young professionals are ready for a financial opportunity milestone.

“The youngest bracket is probably saving for a house, but is less likely to worry about super or immediate needs. They’re also less likely to need the money from their super, retirement funds, or investments, so those can be left to grow, ”said Baker.

“From a retirement pension perspective, a youngster can’t touch his super for about 40 years.

“By nature, when prices go down, people run away and start selling, but it could be an opportunity to buy. So if there is a pension fund with dollars every month or quarter, they buy more of those units than they would if the price was high.

“It’s a change of mindset that’s the same as investing in stocks. “

Recession tips for older professionals

Beyond middle age, people are more likely to be concerned about getting rid of their debts because they are likely to earn more and their children get older. This means that they will have a different approach to their investments.

“Someone like a pre-retiree is likely to be a little more conservative than a youngster,” suggests Baker.

“They can see the end of their working life and they should generally be debt free at this point, so they have excess income for what they want to do with it.

“Beyond that, when you’re older and retired, you’ll see what you have and find out how to make it work for yourself while managing what you have.”

Advice for investors in the event of a recession

When it comes to recessions and investors, there will always be risks. The key is to have a strategic income plan.

“If you can have a lot of investments, work someday and survive on your income, then you may be less concerned with how your investments are going since you don’t need to access funds at that time. there, ”says Baker.

“Someone who lives off their investments and the income they generate must assess their exposure to risk and how long can they survive a recession before they are forced to start selling investments. And Murphy’s Law says that if you’re forced to sell an investment or asset, you’ll never get what you paid for it. So you need to be able to strategically put everything in place for them to work together.

Read more : The best investments to make in a post-pandemic world

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