 The Wild Wild World of Wealth |  |
Out of sheer frustration stemming from the unlimited number of opinions vis-à-vis the direction the U.S. economy, Harry S. Truman stated, “find me a one-armed economist and I’ll hire him on the spot!” Truman was referring to a mindset common to most economists when asserting their opinion: on the one-hand, the economy is doing great; yet, on the other hand, it is not.
Opinions of this nature are virtually useless, particularly to the leader of the free world. Truman wanted what all Americans crave—a clear vision on the direction of the U.S. economy based on education, insight, and logic. Unfortunately, nothing like this exists, which is why everyone from Goldman Sachs and Congress to the average citizen is so confused.
In my previous article, I presented the difficult-to-swallow fact that most Americans will live twenty percent or more of their lives under the economic hardships typically associated with economic recessions. I also promised that I would lay out specific steps that you can take in order to prepare yourself for the next recession. Historically, a recession hits the U.S. economy about once every 5 years, give or take a few years. This fact, in of itself, is not really newsworthy. Nor is it particularly notable that the average recession lasts 1.67 years.
However, digging just a little deeper, it is quite remarkable that since 1793, the U.S. has had 44 Presidents (serving a total of 55 terms). The U.S. has also had 44 recessions. Is this coincidence, or, is there a correlation? Adding to this annoying little fact is that that each U.S President has promised to improve the economy since the very first recession of 1797, also known as the Panic of 1797. Moreover, each President got your vote (or those of your ancestors) by campaigning on the promise that their administration, and their economic and political policies, would ensure that “Americans will never have to endure another recession if you just vote for me!”
America is 217 years old. We’ve had 44 Presidents, and 44 Recessions totaling 75.5 years. This means that 33% of our existence is lived under the economic conditions associated with recession of varying degrees of severity. (Wonder no more why the Tea Party is gaining steam!)
OK, yes, we Americans are a bit naïve when it comes to believing the empty campaign promises of would-be and incumbent politicians. Shame on us!
An optimist might suggest that the glass of American Kool-aide is 2/3 full. And, in a different nation, one that is ranked much lower in terms of per capital GDP, political-economic power, military might, financial transparency, that would be great! But, this is America! The U.S. government expects much from its citizens. Through our deep level of patriotism (and our equally deep pockets) we bailout banks with our taxes when they fail; we support a voluntary military with our blood; and we tolerate political corruption and greed at the highest levels. Yet, not one single U.S. President has been able to provide a sustainable, recession-free environment.
Notwithstanding our naivety, however, it’s important to recognize (and accept) that, no matter what you do, even if you are very wealthy, you will succumb to the economic effects of a recession during your lifetime, regardless of which political party you pledge your vote.
Investors should structure their financial plans around the concepts of modern portfolio theory. Doing so provides a guideline from which their investment decision-making processes can be made at the highest level. Below is a two-fisted approach to help you prepare for the next recession, which according my statistical analysis, will occur within the next 5-6 years. (Thus, if you have a 13 year old at home now who is destined for college, you have the pleasure of knowing that your “college tuition-paying years” will fall right in the middle of the next recession).
On the one hand, you should begin by looking at where you fit in relation to the individual investor life cycle. Depending on your age, you are most likely in the accumulation, consolidation, spending, or gifting phase. By determining which category you fall into, you will begin to gain a better understanding of your own risk aversion characteristics, financial needs and investment goals. In turn, you will begin to make better individual investment choices because you’ll understand which investment vehicles provide the best opportunity to help you achieve your goal.
On the other hand, however, you will also want to begin to prepare for the next recession. Recession planning is not a commonly used term in the investment management industry. Yet, the above-mentioned facts suggest why it is important to plan for the next recession. Typically, this means getting a handle on your cash reserves.
The industry suggests having 6 months of cash on hand (cash does not really mean cash; it means cash equivalents, or, anything that is highly liquid and easily transferable into cash). However, no one really knows how much you will need to survive the next recession. In 2006, a 6-month cash reserve made sense. But, that was before several million Americans lost their jobs and realized that they would be unemployed for 99 weeks or more! The solution to this problem lies in solid financial planning.
Here are some tips. Hire a professional investment manager and / or financial planner. Seek those with solid credentials and a strong educational background. Above all, don’t be cheap. Hiring a qualified, highly skilled financial professional might cost a little more; however, working with a CFP, CFA, CPA, or RIA is the best investment you could make.
In my next post, I will elaborate more on the individual investment lifecycle, and how it fits into modern portfolio management and theory.
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