Nate Dillard

November 07, 2020

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Keeping your financial plan on track in uncertain economic times

Content Powered By Elevate Dayton

By David F. Abney III

The past few weeks have been interesting to say the least. As concerns about COVID-19 have evolved, many Americans, especially millennials, are eagerly looking for ways to protect both their health and wealth. For the first time since March of 2009 when the S&P 500 recovered from its closing low after the worst global financial catastrophe since the Great Depression, the market has fallen more than 20% from its most recent high. As the world awaits the fallout of this most recent global pandemic, even the most financially prepared cannot completely avoid the effect of an economic recession. However, there are ways to still feel financially empowered during a time of recession. 

Here are some general considerations to help keep your financial plan on track in uncertain economic times.

Stay in the market

Investing in the stock market always comes with a measure of risk, including the potential for losing your initial investment. In exchange, you’re typically rewarded with higher returns than those you’d get from savings accounts, CDs and the like. But sometimes the market dips, and your portfolio takes a hit.

So, should you get out when the market drops? Probably not, in most cases. People are living longer than they ever have before and they need their money to last a long time. Keeping your assets invested can help you beat inflation and enjoy the unique financial growth that can come from investing. According to FactSet, from start of the bull market through March 5, the S&P 500 delivered a cumulative return of 462.1%. Above all else, a solid financial plan will account for the ups and downs of the market.

Make sure you’re rebalancing

Throughout your life you’ll want a mix of riskier assets for growth and safer assets for stability. The closer you get to retirement, the less risky you usually want to be. In addition to setting your asset allocation - your mix of risky and safe assets - and changing it as you get closer to retirement, you should also rebalance regularly. A long run of stock market returns can lead to overexposure in certain asset classes and subject you to more risk than you originally planned.

Here’s why: Say you set your asset allocation at 80/20 - 80 percent stocks and 20 percent fixed income. After years of growth in the stock market, your asset allocation could turn into 90/10 if your stocks grow faster than your bonds. When you rebalance, you sell some stocks and buy bonds to get back to 80/20. Then when the next downturn hits, the gains from the stocks you sold will be in those safer bonds. 

Guarantee at least part of your retirement income

Utilizing guaranteed income sources, which are not impacted by market volatility, and accumulating a cash reserve can be smart ways to ride out a recession without serious loss. Pensions, fixed annuities and Social Security are examples of stable sources of retirement income. If you’re on the verge of retirement, consider keeping enough cash in a risk-free location — like a savings account — to cover a few years’ worth of expenses. Cash values in permanent life insurance can be another tool for you to use to fund a cash reserve. In a low-performing market, you’ll be able to tap that cash supply instead of selling investments at a loss. You’ll want to check with your financial professional about how using cash values impact your policy and its benefits.

Diversify!

The goal of diversification is to keep your portfolio healthy regardless of what the market is doing. If the market does fluctuate, you may see a portion of your portfolio respond negatively while another responds positively which could offset your potential losses. So, make sure your portfolio includes a system of checks and balances. That means not only having a mix of stocks, bonds and cash in your portfolio, but also a mix of different groupings or sectors where your investments are made within each asset class. Keep in mind that no investment strategy can guarantee a profit or protect against losses in a down market.

Work with an expert

Facing an uncertain market — especially as you close in on retirement — comes with high stakes. A great advisor understands your financial goals and can guide you to options that truly fit your needs. After all, a strong financial plan can prepare you for the ups and downs of the market to allow you to weather a recession and focus on what’s most important: enjoying your life.