Embrace the volatility when investing in a downturn

I can’t tell you when the next economic recession will start. By the time this publishes, it may have already begun.

Most reputable indicators are flashing warning signs that the economy and markets are headed for a more challenging stretch. There are, however, examples of these indicators being wrong throughout history. The bottom line is that we’re more than a decade into the longest bull market. At the very least, we shouldn’t be surprised by a downturn, and I contend that we should try to embrace it.

When we analyze when people have had the most success with their investment portfolios, some of the most prolific growth periods are during recoveries from recessions. This potential growth, however, requires discipline, planning and fortitude.

Stay detached

Disciplined investing means investing without emotion. It means using your investment portfolio as a tool to accumulate wealth and reach your goals, and not becoming emotionally attached to individual positions and specific accounts. Otherwise, you may find yourself chasing returns by buying high and selling low.

A disciplined approach means setting expectations for everything in the portfolio, reviewing it regularly and adjusting when warranted — regardless of how you feel.

Know your situation

Planning, in my opinion, is the most important component to finding success. It’s vital that investors understand how much of their wealth can be subject to the type of volatility and decline seen through a recession, and how much should be protected for income purposes, emergency liquidity or opportunistic investing down the road.

Retirees have different needs (and risk tolerances) than someone starting their career. A small business owner requires a different approach than an executive of a large corporation. Everyone is different, but everyone should plan for what a change in the economy, and in the markets, might mean to them.

Be strong

Demonstrating fortitude in a downturn may be the most difficult element. There has never been a downturn or recession that wasn’t followed by a recovery that eventually surpassed where things stood prior to the decline. In other words, the market has always gone up over time, and the economy has always grown over time.

If an investor doesn’t believe this trend will continue, it’s hard to see a path for any successful investment strategy. If you assume the market and economy will grow over a longer time horizon, you can embrace the opportunities that significant volatility — or even a recession — can offer.

Consider whether it makes sense to adjust your current portfolio to be more protective after many years of growth, while the markets are up — maybe not today or tomorrow, but when it makes sense for you.

Consider being more aggressive with new money that you’re investing when the markets do decline. There are only so many meaningful downturns that provide the ability to buy low, experience the growth of a recovery and embrace the volatility that can lead to a long-term successful investment experience.

It takes discipline, planning and fortitude. And, of course, I recommend working with a fantastic team of advisers through it all.

 

Marc Tannenbaum, ChFC, CLU, AEP, AIF, is president of Signature Financial Planning. Marc provides comprehensive financial planning and wealth management solutions to high-net-worth individuals, and investment advice and guidance to small and mid-sized businesses, charitable foundations and government institutions. He is also a member of EO Pittsburgh. The Entrepreneurs’ Organization is a global, peer-to-peer network of more than 12,000 business owners with 173 chapters in 54 countries.