Taking your financial ­strategy from zero to sixty: How to prepare for a recession

If you're a car enthusiast, you've probably had your eye on a dream car. For years, you have daydreamed about getting into that shiny car, with that "new car smell," turning on your favorite cruisin' music and then driving around town. And, I can almost guarantee, in fact, I WILL guarantee, that in your new car fantasy you definitely weren't keeping it in first gear the whole time. But you also didn't immediately shift into fourth gear either!! A car enthusiast, or really any driver, will tell you that there are certain processes and methods one has to learn and practice in order to be a good driver. Like dream cars, financial strategies are also engines of growth, provided you learn the right information and prudently execute what you've learned. ----- Anticipating a recession When I look into my crystal ball it tells me that the economy is due for a correction. In all seriousness though, it's incredibly difficult to time a recession. The National Bureau of Economic Research defines a recession as "a significant decline in economic activity [that] spreads across the economy and can last from a few months to more than a year" (The NBER's Business Cycle Dating Committee, https:// www.nber.org/cycles/recessions. html, last visited Sep. 18, 2019). Since the Great Depression in 1929, a recession of some magnitude has occurred roughly every seven to ten years. The last one was the so-called Great Recession in 2008 and 2009. But just because something has happened in the past does not mean it will happen the same way in the future. Nevertheless, it is probably a safe bet that some sort of correction will occur in the coming months or years. ----- Preparing for a recession Regardless of whether the next recession is one month or 10 years away, there are also life events that could hinder a strategy from working out as planned. The market could be humming along, but a one-dimensional strategy would be sidetracked by something like a lawsuit, disability, or unanticipated cost. And even on the bright side, someone over-investing in retirement accounts at the expense of liquidity would be unable to capitalize on opportunities. Just like driving the dream car, a balanced financial strategy needs to operate effectively at all speeds: you wouldn't exclusively stay in first gear and you can't start out in fourth gear. It's important to start in first gear by protecting yourself. Ideally, the protection component has maximum coverage for minimal cost. Next, second gear considers liquidity for the sake of opportunities and emergencies. Third gear is debt structuring because there is a difference between good debt and bad debt. And the fourth and final gear focuses on growing wealth. When it comes to fourth gear, is it best to "ride it out" when the recession comes? Riding it out is less desirable in retirement because a poorly timed sequence of returns has an overwhelming impact on retirement cash flows. But an uncorrelated asset or a sequence of returns buffer can only exist in retirement if it's been planned for in advance. When you're cruising down the highway in your dream car, you still have to be aware of your surroundings. It's important to keep your eyes on the road ahead so you're not making snap reaction at the last second. ----- Want to talk to Kyle about this or other topics featured in The Economic Blueprint? Please email him at kzwiren@financialarch.com or call him at 248-482-3622. Kyle Zwiren, J.D. works with Financial Architects, Inc., an independently-owned company located in Farmington Hills. Kyle and his team serve attorneys and other professionals to help them design financial plans in line with their goals and based on optimal efficiency. Kyle practiced law prior to becoming a Financial Architect and left the practice to follow his passion. Published: Wed, Sep 25, 2019