What you need to know, do, and avoid to get through unscathed
The recent Covid-prompted recession is hot in many minds at the moment, as daily headlines and political announcements warn us of deficits and dire futures to come if we don’t make a change.
But for everyday Kiwis, what impact will a recession have on our lives, and what can we do to get through it?
Read on to find out how an economic downturn will affect your finances, and what you need to know, do, and avoid as the markets rise and fall depending on the news of the day.
What you need to know about your financial situation in a recession
Recessions are not new and not totally uncommon, either.
Occurring on average
once every ten to fifteen years, in a lifetime you’re likely to experience several recessions of varying intensities.
Because of this, financial planners factor the potential for these events into your plan. We expect there to be a number of recessions over the time of a plan - they’re a fact of life that we can plan for.
In reality, though, a recession shouldn’t affect the average person’s daily life or financial goals in a tangible way unless they lose their job or their business takes a knock.
If you maintain your income you might not even notice a recession, aside from in the newspapers. Even if you lose your job, it will hopefully only affect you in the short term - you’ve still got your long term goals and long term plan, which should outlive the downturn. In addition, an essential part of any plan is to work towards building up enough of a financial buffer, which can give you comfort at difficult times.
What you need to do & avoid to get through this recession intact
The best thing to do in uncertain times can also be the hardest – nothing. Well, nothing immediate.
What we really mean is to avoid acting on any knee-jerk emotionally-driven reactions to the situation, which could potentially jeopardize your financial stability. In the short term, financial markets can be especially crazy as the impact of the possible recession is worked out.
When the markets took a sharp downturn in March 2020, people panicked. They thought they should be doing something to react, but the truth is the best thing to do was just to keep on as they were.
A good financial plan is designed to withstand all of these different conditions - the worst thing you can do is make a knee-jerk emotional reaction with your investment, like so many people did with their Kiwisaver portfolios in March, switching from growth focussed shares to conservative cash funds.
At NZFP, we get you to focus on your goals in order to make informed decisions and have an action plan for all eventualities. Are your goals still the same and are they still achievable given your circumstances? Are you still planning to work until you’re 65? If there are any changes to make to your investments and overall financial plan, it’s at this greater level of long-term goal, not at the micro level of day-to-day activity.
It’s human nature to want to control various aspects of our lives, which is why we feel like we should be doing something in uncertain times. The sensible thing to do is to understand what actions will have the best possible impact on your long-term security and often that means sitting tight and letting your plan do what it was designed to do.
Your plan gives you options, clarity and helps take the emotion out of decision making, usually at emotional or scary times.
What you need to reassess to create a stronger post-recession future
This advice to sit tight and stick to your plan of course depends on whether you have a financial plan in the first place, and whether your risk profile and ability to meet your goals still rings true in light of these events.
If you’re feeling overly uncomfortable or overwhelmed with the volatility of the market, you are probably getting your first real experience of what risk actually feels like and it may be time to have an open discussion with your financial adviser about your risk tolerance profile.
Are you in the right place? Have you got the right mix of investment assets? This is an ongoing discussion to be had with your adviser to ensure you’re in the right place with your money, to reach your goals at a level of risk you’re comfortable with.
Your risk profile comes down to your need for growth, time frame, and how you feel about volatility. This isn’t something to have an emotional reaction about and go back and forth over. After discussion with your adviser, you may need to adjust your overall portfolio risk exposure, but be aware this can have an impact on the viability of your longer term financial goals.
The dramatic changes in the economy this year have reinforced the importance of having a trusted adviser to lean on for reassurance and guidance. We aim to keep you on track toward your goals, no matter the economic weather.
