Market’s Down, Inflation’s Up and Recession Fears Rise—What Should I Do?

We entered the year with a good bit of market volatility and further talk of a possible recession (a prolonged period of negative economic growth). With tariffs thrown into the mix, the market is now flirting with entering bear market territory (which means 20% or more decline in stock prices from recent highs). Concerns of sticky or increased inflation are growing, and fears of a recession are on the rise. So, how should we think about this, and how does it affect our financial plans?

We Must Remember This
Let’s get some perspective on the familiar patterns that hold key lessons to apply today. While the specific circumstances and catalysts change, we’ve experienced 14 bear markets and 13 recessions since 1942. But these don’t always happen simultaneously. In fact, more than a third of those recessions occurred during a bull market (which is a 20% or more gain in stock prices from recent lows).

Bull markets always follow bear markets and last much longer. The average bear market lasts 11.1 months with an average cumulative loss of 31.7 percent, while the average bull market lasts 4.3 years with an average cumulative gain of 150%.

That’s a lot of math, but we must remember it for this reason: While the market is volatile and can go down, historically it goes up more than down. And during each of those bear markets and/or recessions, something was happening that made us say, “Yeah, but this time is different.” The COVID Pandemic, mortgage crisis of 2008, dot-com bubble, Black Monday, etc.—every one of those, and most other events that have led to bear markets and recessions, felt like it was different from every other time. And to an extent it was.

However, if we can push aside the sound bites and see our way past the fear and emotions, sound advice on personal finances is almost always the same.

1. Stick to your financial plan. A solid financial plan is one that’s good before, during and after a bear market or recession. It should be built to weather any storm, and it’s wise to stick to it. If you don’t yet have a plan, or if you’d like a second set of eyes on it, now is the time. In either case, here is some good advice.
   
   
2. Resist the urge to sell and go to cash. Despite the lure of safety in selling your stock/equity holdings and moving into cash, you’re faced with a new set of challenges. First, you are locking in whatever losses have occurred to that point. And second, you have to figure out when to get back into the market. (If you’re going to keep up with inflation, you need at least some equity exposure in your portfolio). Statistics show that by the time most people feel comfortable getting back in, they will have already missed most—if not all—of the rebound.
   
   
3. Work on increasing liquidity. Having enough liquid cash reserves is important through all life and economic cycles, especially if you’re nearing or already in retirement. The amount of money you should have in an emergency fund and/or in cash reserves will vary based on your unique circumstances, but it’s important to have enough to keep you from selling stocks when they’re down or going into debt to make ends meet. Let challenging times be the motivation to set aside a little more out of each paycheck.
   
   
4. Reassess your asset allocations. It’s easy to be a cowboy during great economic times and have everything in equities when the market is soaring 20+ percent every year, but trees don’t grow to the sky. We sometimes overestimate both our risk tolerance and risk capacity. If the recent market turmoil has you awake at night and full of fear, use this as a sign that it may be time to adjust your future asset allocation, to further balance risk and reward, and move towards having a higher percentage in lower risk investments like bonds that serve as a ballast during volatile times. Also, your risk capacity (i.e. how much risk you can actually take without jeopardizing your financial stability and objectives) changes over time and needs to be considered, too.
   
   
5. See it as an opportunity. Warren Buffet says to be fearful when others are greedy and greedy when others are fearful. Translation: the worst of times are often a great opportunity to buy good companies on sale. It’s counterintuitive, but when a lot of people are thinking of selling everything and running for the exits, that can be the best time to put money into the market. At the same time, no one knows what it’s going to do today or tomorrow (or next month or next year), but over time it has historically gone up. An “always be buying” dollar cost averaging strategy is something to consider.
   
   
6. Make adjustments to strengthen your financial life. As much as things seem to change, sound financial principles don’t. For example, spending less than you make, investing the difference and properly managing debt have always been key to long-term financial success. And within each of those are a lot of details on how to most effectively do it. Then you have other important considerations like insurance, estate planning, managing taxes, etc. This is a great time to revisit what you’re doing in these areas to ensure you’re in the best position both now and in the future. Check out these resources that can help.

Current times are truly difficult and challenging. Staying calm in the middle of the chaos and not making decisions out of fear or panic is perhaps the best advice. Focus on controlling what you can. History is on our side, and those who stick to their well-thought-out, long-term plans are usually rewarded. And a good financial advisor is priceless.

If you're a small business owner, this advice can help you navigate tariffs and changing markets.