What You Can Learn from a Market Recession

A few weeks ago, the National Bureau of Economic Research (NBER), a private, nonprofit, nonpartisan research organization, reported that the “Great Recession” ended in June 2009 after an 18-month span. The organization based its ruling mainlyJoel Johnson on the rise in gross domestic product (GDP) the two quarters preceding. Though the NBER is considered the official party to call and end recessions, there are a number of economists and scholars, not to mention American people, who would argue its ruling.

Although the past four quarters have experienced positive economic output, the amount has started to slip backwards. The Federal Reserve recently issued a “cautious” outlook, noting that recovery had slowed in recent months, and has refrained from increasing the interest rates. While the fear of a “double-dip” recession is gone, according to the NBER, a new downturn in the economy resulting in two consecutive quarters of negative GDP would be considered a new recession.

So, will recovery hold? No one knows for sure. But, with Connecticut reaching a near 9 percent unemployment rate and $3,125 per capita in state debt, the fear of a ‘new’ recession is a concern here at home.

Though the “Great Recession” brought hardship to many, it has also taught us valuable lessons: don’t put all your eggs in one basket; make sure your choices match your goals; don’t retire from retirement planning. We now have the opportunity to plan ahead in the event a second recession comes to be. Given the three most common hardships experienced, the following strategies can help you to “recession proof” your finances now to possibly protect you against some of the negative consequences any future recession may bring.

Lesson #1: Don’t put all of your eggs in one basket. Many who experienced substantial loss during the last recession may not have had proper diversification of their financial accounts. Never place all of your eggs in one basket. If you want to diversify completely, one strategy to consider is to incorporate non-correlated investments, which are investments whose returns are NOT solely reliant on the performance of the stock market. Take an interest in interest-bearing accounts or consider other options such as commodities and insurance products, like fixed annuities, to diversify your portfolio.

Lesson #2: Make sure your choices match your goals. Many individuals lost money in investments they needed access to in the near future. They didn’t invest conservatively, or according to their risk tolerance, and lost the funds needs for retirement or to put their children through college. Take into account your age and timeline to retirement when considering investment options, as this helps determine your ability to “ride out” market volatility.

While ideally you don’t want to expose your finances to any unnecessary risks, risk can also provide upside potential. Always ask yourself, “Is this financial risk really worth taking?” With the instability of our current economy, if your financial loss outweighs the potential benefit, even by a little, you should probably pass.

Lesson #3: Don’t retire from retirement planning. There’s a false sense of security when we become reliant on employers for retirement. In recent years, many employers have discontinued contributing to 401(k)s, pensions became harder to fund and investments linked to troubled companies have disappeared. With this unfortunate trend regarding retirement benefits, it is becoming more apparent that you have to be responsible for your own retirement savings.

One option to optimize your retirement savings is to consider a Roth conversion, allowing for tax-free withdrawals in retirement. As of this year, Roth IRAs are available to anyone, no matter his or her income. If converting is the right option for you, do so before the end of the year so you can lock in this year’s tax rates. It is likely that, in the future, you may be paying a higher income tax rate on the conversion amount or on the distributions in retirement.

Some economists believe that due to the lack of a quick recovery, combined with continuing unemployment and foreclosure problems, we could see another recession as early as next year. Of course, others argue that a recovery is still underway and, although slow, it is steady.

The bottom line is we need to learn our lesson from the last recession and take action to recession proof our finances against the possibility of a new recession. The options given can put you on your way to financial stability in a world of economic uncertainty.

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