How Can You Prepare For A Recession?

Speaker 1: 00:00 Well, the weather forecast looks great. The economic forecast, not so much from tariffs and trade wars to a soft housing market. Indicators are leaning toward a recession and with inflated housing costs, Californians could be hit hard. So is there anything we can do to prepare our wallets and investments? Paul Lim is a financial planner and advisor with the San Diego Financial Literacy Center. He says, yes there is. Paul, thanks so much for joining us. Thank you for having me. Okay, so give us the bad news first. What are economists worried about and why? Speaker 2: 00:35 Well, economists will use a number of indicators such as lower auto sales or fewer freight shipments in order to gauge the overall health of the economy. But what they're most concerned about right now is this thing called the inverted yield curve. And what that means is that short term debt is paying you a higher interest rate than longterm debt, which seems strange because if you buy a bond that pays you back in 10 years, you would expect to be paid a higher interest rate than a bond that pays you back in two years because you gotta be compensated for that additional time during which your money's inaccessible. And so when that relationship flips around, some people think that it means that people are pessimistic about the future. And it's something that always seems to happen like two years or so before a recession. And so economists note that correlation and they're kind of concerned about it. Um, I should mention that there are really good economic numbers like unemployment and GDP growth that tell a bit of a different story. Speaker 1: 01:36 Oh, so with so much uncertainty, how should people organize their finances? Speaker 2: 01:40 Well, one of the really nice parts about the financial planning profession is that we take uncertainty as a given. And so planning for the future, knowing that you need to have a backup plan for every eventuality is a part of the process. From the very start. So when it comes to risk management, it could be something as simple as having an emergency fund in the bank or owning the right kinds of insurance policies. Or it could be as complex as working with a business attorney to protect your company from unforeseen risks. And then when it relates to investments, we utilize the diversified portfolio and what that means you, you own a little bit of every single asset category so that you can capture market gains no matter where they happen, and then spread out your risk when the trend turns the other way. Speaker 1: 02:28 Hmm. Now what about those big life decisions like marriage, Babies College, uh, or even buying a house or car? Should people hurry up and make those purchases and those decisions or, hold on. Speaker 2: 02:41 But I would say the one thing they all have in common is the financial readiness aspect of things. And what I mean by that is that you've already put in good habits in advance whereby you're spending a lot less than what you're earning so that you have an extra amount of income with to maybe cover a larger mortgage payment, pay for property taxes, put a down payment so that you can get more favorable loan terms. So it's all about the prep work that you do in advance before entering into any one of those commitments. So I think you should do an assessment to figure out if you're financially ready to handle those things. How would interest rates be impacted, uh, in an economic downturn? Well, you know, one of the things they say about interest rates is that, uh, our central bank, the Federal Reserve will basically cut interest rates when the economy is having a tough time. Speaker 2: 03:33 So they say it's like pumping the gas or they'll say they raise interest rates when the economy is doing really well. It's like applying the brakes if we want to use that sort of analogy. And when it comes to future forecasts, people are saying that they might cut interest rates again perhaps at the end of this year in order to, uh, make it a little bit easier for consumers to borrow money. Because when the interest rates go down, it means that the number one borrower on the planet with the best credit in the world, which is the u s government, is suddenly paying less for all the debt that they borrow. And so that affects every other interest rate on earth because everybody has to fall in line to that hierarchy. So similarly, if all of a sudden the u s government were to pay an extra percent for all of the debt that it borrows, or you can't see anybody borrow money for less than that interest rate. Speaker 2: 04:26 So they all have to adjust accordingly. And so that relationship is important. It's so newsworthy because the most credit worthy borrower on the planet and the rate that they pay affects all other borrowers on earth. And so if you see a cut in interest rates, you might anticipate the stock market rising and seeing some better deals on home loans and things of that nature. If you see higher interest rates going up, well you can still be happy cause it might mean that you can earn better amounts in a savings account or with insurance products. So it goes both ways. All right. So tell me about the retirement portfolio. Should people, uh, leave it alone, withdraw their money, move it around? I mean, what do people need to deal with those? Yup. So step one would be to own the diversified portfolio and you do that by completing a risk quiz or an online assessment and that will guide you to tell you how much of a percent you should have in each asset category. Speaker 2: 05:21 And then you'll create the portfolio that way in accordance with a model or a template, many of which are available online. Uh, if you already own the diversified portfolio, you could make some small adjustments throughout the year in a process called out rebalancing. And what that means that every 90 days or so different portions of your portfolio are going to change their overall percentage because they're going to perform differently relative to each other over time and so what you do is you'll sell off parts of the funds that overperformed and now comprise a larger percentage and then you're going to buy the funds that underperformed in order to bring yourself back to that original percentage mix and that might seem strange at first to sell off the funds that did well and buy the ones that underperformed, but that process will force you to always buy low and sell high and it takes all the guesswork out of what you have to do in adjusting your portfolio. All right. We started with the bad news, but the good news is that today, right this minute, the economy is good and that gives people time to plan, correct? Absolutely. There is no better time to plan for the future than today. I've been speaking with Paul Lim, a financial planner and advisor with the San Diego Financial Literacy Center. Paul, thanks so much for your advice. Thank you for having me. Speaker 3: 06:41 [inaudible].