We’ve had a bumpy ride with the stock markets this week, and after the historically long bull market we’ve been enjoying over the past decade, many are wondering if this is just a short-term market rout, or the beginning of a bigger and more persistent global recession.
The only way to know is to wait and see, but we can look to past recessions for some sense of what to expect.
The 2008 financial crisis is the most recent recession most of us have witnessed, and in it, the
DJIA, -2.13%
lost a full 50% in 17 months, with the S&P 500
SPX, -2.06%
diving 56%. While that was scary to live through for those who were invested in the markets at the time, the good news is that, historically, the average time from market trough to new market peak in bear markets is 684 days, about 22.5 months, a number that’s likely skewed higher by the especially long 1974 to 1982 recession.
In market corrections — dips between 10% and 20% — the average correction is 107 days, just over three months. Those time frames don’t account for inflation, meaning the time between a crash and returning to equal spending power is slightly longer. So if the current volatility follows historical patterns, we could expect this bumpy ride to last anywhere from a few months to a few years.
For those who retired early — or who aspire to — what should you be doing right now?
1. Do nothing
Don’t panic. Don’t freak out. If you can help it, don’t even look at your account balances. Unless you need to sell shares right now, your portfolio losses are only losses on paper, and if you’re investing for the long term as you should be, dips are meaningless. And whatever you do, don’t start selling shares or reallocating investments in response to the market volatility, an approach that’s virtually guaranteed to lose you money in the long run, while buy-and-hold investing is proven to make you money over time.
2. Cut spending
If we get into recession territory, it’s a good idea to cut your spending so that you can stretch your cash cushion as long as possible. (Ideally you have at least two years of living expenses saved in cash, advice for traditional retirees that applies equally to early retirees.)
Eliminate frivolous spending, DIY everything you can rather than hiring others to provide services to you, reduce your fuel and utility costs by driving less and keeping your house colder in the winter and warmer in the summer, defer large purchases until after the markets recover, and if you wish to keep traveling, travel on miles and points and choose cheaper destinations like Southeast Asia instead of Western Europe, or focus on camping around the U.S. instead.
3. Find additional sources of income
If you’ve already cut your spending to the bare minimum in order to retire early, you may find it more doable to earn a little extra. Consider ways to earn money with your home, perhaps by renting it out on Airbnb on occasional weekends or taking in a roommate. Consider starting a side hustle that’s both fun for you and brings in some additional income. Or talk to old career connections about whether they need some part-time consulting help rather than hiring full-time staff when budgets are tight.
4. Be judicious about selling shares
The biggest risk to any retiree’s portfolio is sequence of returns risk, also known as sequence risk, which occurs if you have several bad stock market years in a row, especially early in your retirement. And the single best way to avoid sequence risk is to avoid selling shares of anything in your portfolio. Do your best to rely on dividends first, as they don’t deplete your portfolio, and if you must sell shares, sell bonds first before you tap into your stock fund holdings.
Given the historically low yields bonds are currently offering, you’re not likely to miss out on a lot of growth potential by unloading bonds if this correction turns into a recession. A well-diversified portfolio should include some bond funds in addition to your cash cushion, and between the two, you should be able to ride out any average-length recession.
5. Don’t scrimp on insurance
Though it’s tempting when you’re tightening the belt to cut all expenses, this is not the time to scale back on health insurance or other protections that limit your total potential costs. If your state allows non-ACA-compliant catastrophic plans, you may be tempted to switch away from traditional health insurance to the cheaper option, or to move to a health care sharing ministry, but that penny-pinching could backfire if you have an accident or develop a serious illness. Only Affordable Care Act-compliant plans have a guaranteed out-of-pocket maximum, and with any other plan, you risk facing massive bills.
But a good option for saving a little money might be to revisit your auto and homeowners policies to see if you can bring the price down by raising your deductibles without reducing your overall coverage.
6. Make your cash work harder for you
If interest rates rise, that should mean better returns on cash savings, especially with high-interest savings accounts and short-term CDs. Shop around to ensure you’re getting the best rate, and look for bonus incentives banks sometimes offer to open a new account.
7. Use this as a buying opportunity if you can
If you haven’t yet retired and are still accumulating assets, any market dip provides an opportunity to buy shares at a discount. While studies show that attempting to time the markets rarely pays off, if you’ve been sitting on some cash, this might be the right time to put it into index funds. And if you’re interested in more advanced strategies that minimize your income taxes, you might explore tax-loss harvesting, though be aware that practice could come back to bite you when you do retire and wish to keep your income low for health care subsidy purposes, because your cost basis on shares will be lower and therefore your capital gains and income will be higher.
Corrections, and even crashes, are a normal part of the stock market cycles, and you don’t have to let them throw you off your path. Stay focused on the long term, and in all likelihood, you’ll be just fine.
Source : MTV
