Whether the Trade Wars end soon or not, the U.S. appears overdue for a recession.  Markets, weather, and economies are cyclical.  The great boom of the 90s ended with the Tech Wreck of 2000-2002.  The U.S. economy was already in recession before 9-11 and there was nothing the government could do to stop the needed cleansing process of an old-fashioned recession.

The 2010s also saw a boom to rival the 1990s.  We have Millennials who have worked for ten years and have no clue what it is like to live through a recession as an adult.  Unfortunately, many of them still have consumer debt, insufficient cash reserves, and retirement plans that are 100% allocated to stocks.

My crystal ball is just as cloudy as yours and it could be a few more years before the next recession ravages retirement accounts and bankrupts the weakest balance sheets.  I can confidently say that the prudent person should create a plan now for how they will thrive during the next recession.  Here is my list of the three things to do and not do during the next recession.  Let’s start with what to avoid.

Don’t Look at Your Investments Everyday

With almost 20 years of experience as a Financial Planner, I have found that the majority of my clients look at their accounts once a month or less.  When the news starts to get bad and markets turn from bull to bear, a segment of people will turn from blissfully enjoying the bull market to hyper-focused, part-time market analyst.

Some of these investors will take the most dangerous step: calculating their all-time high balance and calculating their daily or weekly losses compared to that high.  While it should be expected that a moderate portfolio will lose at least 10% during the next recession, losses play the worst mental tricks on people.  Instead of recognizing that a 10% loss is well within the range of the risk they were taking, this type of investor will obsess with the $100,000 (paper) loss on their $1 million portfolio.  They will go down the slippery slope of thinking about how many years it would have taken them to save that much and.  Some people equate their net worth with self-worth and watching their investments so closely leads them down the next mistake to avoid during a recession.

Don’t Look at Financial Pornography

“If it bleeds it leads.”  Business television, magazines, and websites need your attention to sell adds.  If they dispensed quality investment advice like diversification, thinking long-term, and rebalancing, you would quickly lose interest and go to their competitor’s medium.  Instead they prance out the perma-bears to tell you how bad things are about to get.  Underneath their names will be information about how they called the last two recessions and the ’87 crash!  In a fearful state, many will be suspectable to the seduction of believing that these gurus can predict the future.  Few will do a quick internet search to see that they have been calling for a market top every year since 2013 or that they recommended buying gold $500 higher than it is today and Bitcoin at its peak.

During the next recession, people with horrible track records will extract thousands of dollars from investors who don’t know any better by selling their newsletters or taking their investment management fees.  As I write this, the S&P 500 is less than 7% below its all-time high and here is a sample of headlines from just one website:

If You Weren’t Worried, Worry Now

Trade Wars are the ‘Enemy of Growth’ Report

This Cycle’s Most Dangerous Bubble, In Three Charts

Risks for the Second Half of 2019 are Mounting by the Day, Part I

Let me repeat, this is a sample of headlines from one website on a day where the stock market is down less than 7% from its recent ALL TIME HIGH!  How negative do you think the articles are going to be when stocks are down 30%?  If you don’t have a plan now for what to do during the next recession, you are going to be susceptible to the financial porn industry and that might help you make the last big mistake.

Don’t Try to Time the Markets

I have tried many market timing systems, newsletters, and funds.  One famous fund I was invested in correctly called the recession of 2008, but then went back into stocks in the fall of 2008 just as the real losses came.  Another famous fund barely lost any money in 2008, but then remained hedged for years after the bottom—I think the manager is still hedged.  Even if a strategy works over the VERY long term, most investors will not be with the fund/strategy that long because the wrong moves cause emotional damage and it is too hard to stick with a timing strategy that is wrong a few times in a row.

With so many people trying to time the markets, someone is going to get lucky and look like a guru.  Don’t be tempted to time markets.  Even if you are lucky and get out before markets go lower, I find that when things get really bad, it becomes almost impossible to pull the trigger and buy into a collapsing stock market.  You were right about the drop and then you convince yourself it is going to get worse.  I have met a few investors in the last ten years that pulled out of stocks and couldn’t force themselves to buy back in because markets were so much higher than the March 2009 low.  Timing means you have to be right twice.  As Peter Lynch said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Beyond my personal experiences of working with actual humans through two very bad recessions, there is a lot of academic research devoted to this subject.  Here is a small sample of articles you can read on the matter:

Beware Lure of Timing Market

Time Pickers: Understand That No one Can Time the Market

Yet Another Study Shows That Timing the Market Doesn’t Work

Next time you are tempted to time the markets, read these market timing quotes from some of the best investors who ever lived.  My favorite from the list is:

Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.

-Warren Buffet

Now that we have covered what not to do, here are the three things to do during the next recession.

Do Pay Off Your Credit Cards and Build Your Cash Reserve

Do you remember the term jingle mail from the Great Recession of ’08-’09?  The unprepared people who were living up to or beyond their means mailed their keys to the banks because they couldn’t afford to keep their houses.  When the economy has been booming for a long time and you are proud of your net worth statement, it is really easy to think that the boom will continue.  Don’t fall into this way of thinking.  Low interest rates cause people and companies to borrow too much and bubbles eventually get popped.  Recessions are the natural outcome of bad lending and excess risk taking.  Just as the moon will go through its phases and it will be cold next January, there will be a recession every five years or so for the rest of your life.  We don’t know when it will be here, but the wise get their house in order during the boom.

Since it has been ten long years of boom time, my advice to people with credit card debt and insufficient cash reserves is to get serious NOW!  If you don’t decide to change, changes may be forced upon you.  Spend a fraction of the time you spend on Social Media and Television to make a budget and look for ways to cut back.  My article on the best ways to save money can get you started.

If you are self-employed, commissioned, or get bonuses, run your budget with a 20% cut in pay and take out the bonus.  What would need to change if that money didn’t come in?  Things are still rosy for the most part right now and Ford just announced a 7,000 person lay off following a recent 8,000 worker cut at GM.  How long will your cash reserve last in the event that you or your spouse lose their job?

Some people reading this will unfortunately lose their job in the next recession.  In addition to fixing your budget you need to work extra hard to make yourself as invaluable as you can to your employer.  I have watched the agony of layoffs with several of my own clients.  Sometimes they have had to change industries and take large pay-cuts at their next jobs.  Many people 55 and older experience age discrimination and see a permanent drop in compensation when they are able to return to work.  While you can’t protect yourself from every calamity in life, you can certainly give yourself the best chance by networking, being likable, and adding as much value as you can for your employer.

Do Take Care of Your Mental Health

During the next recession, I am going to do everything in my power to focus on long-term investing when stocks start crashing.  I am going to look at charts that show how well the stock market has done despite recessions, wars, and inflation.  I am going to re-read books by my favorite investment writer, Larry Swedroe.  I will also go out of my way to read positive books to remind myself of the unbelievable progress humans have made and counteract the negativity I will be surrounded by.

You and I will also need to fight our body’s natural urge to eat poorly and drink too much when stressed.  While junk food feels good in the moment, it usually makes you feel worse later on.  Walking 45 minutes or more per day has been shown to have incredible health benefits.  There are a lot of studies that show exercise and walking are as effective as anti-depressants.  I recommend you find something that gets you away from your smart phone and forces you to disconnect.  For me that is playing basketball.  I lose track of time and give the games my complete focus.  Others might find swimming, walking with friends, or cycling work for them.

The last thing you can do to get through a tough recession is to focus on gratitude.  Take time each day to write down all of the things that you are grateful for.  Send a letter each week to a friend to tell them how much they have impacted your life.  Reconnect with friends and build your social circle.  Do not neglect your mental health during the next recession.

Do Stick to Your Investment Plan

The last do assumes you already have a plan.  My investment plan and plan for my clients is based on the academic research that shows humans are awful at predicting almost everything.  It is important to have a plan that anticipates that recessions will happen and to not take more risk than you need or can handle.

My personal investments are about 50% stocks and 50% bonds.  While my bonds don’t pay much interest right now, I like them to be safe-bonds that are likely to go up or at least not lose much during the next stock market panic.  For the times when I will look at my statement, I am going to go out of my way to focus on how many years of savings that I have in safe bonds and not calculate losses on the stock portion of my portfolio.

In up stock market years, it is easy to wish all of your money had been in stocks.  When the sky starts falling, I am going to be thankful I had these boring bonds and a cash reserve.  I will continue to max out my 401(k) plan and stick with my savings plan even though I will not want to.  I will try to think about the long term and about how many shares I am buying, instead of my recent poor returns.

At some point, it is likely that my portfolio will become too heavy in bonds and I will re-balance it by selling some bonds and buying stocks in a terrifying crash.  While I know I will not want to execute the trade when the time comes, I will focus on the long term and how this is likely a buying opportunity.

While me and my clients have been frustrated by International Stock performance over the past decade.  I will continue to stay diversified because I know there is a good chance that Foreign Stocks will do better than U.S. stocks over the coming decade because of their relatively low valuations.  Since I have no idea whether US or Foreign stocks will do better each year, I will continue to own both.

While we can’t control the future, we can control our emotions.  I hope something I have said gets you motivated to make plans for the next eventual recession.  While it will likely hurt all of us, people with a plan can come out better than others on the other side.