Recession Ahead: How to Protect Your Financial Plan

Inflation is breaking records at more than 8%, and a global recession is likely on the horizon for 2023. While the news can be daunting, there are several steps you can take to stabilize your financial plan during a rocky economy.

Create a Financial Plan (or update the one you have)

A financial plan is your guiding light in a tumultuous market because it documents your short-and-long-term goals. If you don’t already have a formal financial plan, your financial team can work with you to outline your different goals and values, and the financial steps needed to achieve them.

Your financial plan should reflect where you are in life. If you are building your wealth, your financial strategies are going to look different from someone who is preparing to sell a business and retire. Whatever is important to you and whatever you want to accomplish should be reflected in your plan. Then when the markets shift, you can feel confident in your financial approach, and ensure your assets are protected during difficult economic times.

READ — What Does a Recession Mean for Your Finances?

Finally, your financial plan can be your budgeting tool as you navigate rising inflation for your day-to-day expenses. Now is a great time to either start your financial plan or review and adjust your plan with your financial team.

Check Your Emotions

We’ve all heard that we should buy low and sell high, but when the market is headed for a recession, it can be difficult to know exactly what you should do with your investments – and it may feel like time is of the essence. Throughout history, there have been multiple events that have impacted the markets, and, ultimately, the markets have rebounded.

To help keep your perspective, according to the National Bureau of Economic Research, between 1854-2020, the average U.S. recession lasted 17 months. This is important to remember as we move through the latest cycle, and you review your financial decisions – the economy is cyclical. Instead of quickly reacting to the day-to-day events of the market, lean on your financial plan and the goals you’ve already set in motion. Call your financial team and let them know your concerns. Ask questions about what they are seeing so you can ensure your goals are still on track.

For most investors, their investment portfolio is built on a long-term strategy, so volatility in the short term is less important than the long view. Keep your emotions in check to avoid over-correcting and instead, strategically respond to the market evolution with your end goal in mind.

Understand Your Risk Tolerance

When you create an investment strategy, understanding your risk tolerance is critical. This can be determined by several factors based on your short- and long-term goals. For example, you will likely have a higher risk tolerance when you’re building wealth as a new investor than when you’re maintaining wealth as you near retirement.

Either way, it is important to discuss what you are comfortable with in your meetings with your financial team. Your risk tolerance can also change with the flow of the market. Communication with your financial team is critical so you can rebalance your portfolio if needed. Remember — changes can always be made, but as mentioned earlier, you want them to align with your financial plan.

Check Your Tax Efficiency

Another important part of your financial strategy is your tax efficiency. Taxes naturally play a big part in your expenses and your portfolio strategy. As we near a recession, it is a great time to talk with your financial advisor about your taxable accounts. You may want to consider tax-loss harvesting. This is when you sell some investments at a loss to offset gains you may have realized from other investments, which can help reduce your tax bill. Or, you may want to convert an account to a different position to support your financial goals, which would also change your tax bill.

READ — 4 Tips for Tax-Efficient Investing

Turn Off the Noise

We live in a 24/7 news cycle, which can be overwhelming and produce anxiety. It is hard to escape the constant chatter that surrounds the economy; however, it is important to take a break. Rather than becoming consumed with the daily headlines, lean on your financial plan and team. A strong partner will provide consult and comfort in volatile times.

The different cycles of the economy are intimidating but know they are cyclical and will rebound. As we head into more economic uncertainty, rely on your financial plan and team to steer you through.

Abdur Nimeri is co-chief investment officer of UMB Private Wealth Management. He has more than 14 years of experience in the financial services industry. Nimeri earned a master’s degree in financial mathematics from the University of Chicago and holds a PhD in physical chemistry from Ohio State University and a bachelor’s degree in chemistry from Iowa State University of Science and Technology.