Financial Planning in A Recession: Managing Downside Risk

April 24, 2020

Financial Planning in A Recession: Managing Downside Risk

You know, in light of the dramatic events surrounding the COVID-19 pandemic, many, if not most of us, have begun practicing all sorts of ways of managing our downside risk.  Many of us have stocked up on grocery staples, like food, paper towels, bleach, cleaning supplies, etc. Who would have ever thought that rationalizing toilet paper would become a new normal?  

We have sought to ensure that communication and basic necessities continue to flow to our older family members and friends that are at higher risk.  Most of us have become more diligent about protecting our physical and mental well-being, too.  

 In many ways, we have all set into motion plans and systems to address the dangers that the virus poses to our own households.  Many of these plans have been thoughtful and well-reasoned.  We’ve limited the number of trips out of our homes, we have a reasonable food and basic supplies on hand, and some of us wisely have set up routines around work, exercise, and entertainment to give ourselves a sense of normalcy.  Unfortunately, there are some who have done very little, other than to ignore what’s going on or give into fear.  Maybe, even worse, some of us envision that downside risk management solely consists of filling your garage or basement with a five-year supply of toilet paper.

The reality is that some folks were better prepared. They felt compelled to begin risk management earlier.  Some were able to get an elderly loved one into a safer place or took steps to mitigate the risk early on.

Folks, are you prepared for a financial virus?  You see, you should always have downside risk management (even prior to current events) in your financial systems.  Look, market volatility and bear markets are inevitable.  Right now, if all the talking heads are correct, we are going to experience a fairly dramatic recession.  If you don’t have downside protection in your plan today, well, it is not too late.  Just riding this thing out should not be an option here. 

We cannot predict with any kind of precision what will happen with the financial markets.  What we can say, truthfully, is that the US economy has been a cycle of bull and bear markets.  There have been numerous financial crisis throughout US history.  The housing bubble collapse of 2008 is the most recent one that most of us lived through and remember.  The markets took 6-9 years to get back to even.  Most of us have heard about the Great Depression of the 1930’s, either through grandparents or history class.  The markets took a full 25 years to get back to even.  There were also eleven events alone in the 19th century that were classified as “panics” followed by recessions that included bank failures and sluggish economic growth.  Again, a long recovery followed.  All of these demonstrate that the economy is durable and will recover.  However, just how long that takes is unpredictable.  What we should be doing is adding risk mitigation techniques into our financial systems to help manage the risks related to the duration of the recovery and then adjusting as more clarity is gained.

Simply staring at the risks to a financial system and just holding on does very little to remove those risks.  There are a multitude of approaches to consider implementing, including asset rebalancing, hedging positions, quantitative data and insurance instruments, such as annuities,  that may or may not be appropriate for a particular situation.  Your personal circumstances and goals are going to dictate what downside risk management approach or combination of approaches you take.  

As with other things in life, downside risk management has a more profound impact the earlier it’s introduced into a system and accounted for.  It may be possible, even now, to find opportunities to mitigate risks to our systems. If you have not done so yet, you must take a thoughtful review of your system and then the prudent adjustments.

Moving forward, we need to remember that another economic downturn is likely inevitable at some point.  Don’t get fooled by a false short-term recovery.  This is not the time to discard or minimize the importance of assessing and addressing downside risk. 

Folks, we just entered into a bear market in record time.  Bloomberg predicts a 100% chance of the worst recession we have ever seen within 12 months.  Billionaire Paul Singer’s Elliott Management said global stocks could tumble further, ultimately losing half or more of their value from February’s high, as the world braces for the deepest recession since the 1930s-era Great Depression.

This is not the time to just “ride it out”.  So, what’s your downside risk strategy? Do have one? Should you?  You betcha!

So as always – be vigilant and stay alert, because you deserve more!

Have a great week and please stay healthy.  We are all in this together.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at jeff@cutterfinancialgroup.com.

 This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Market data and other cited or linked-to content in this article is based on generally-available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A and applicable Form ADV 2Bs. Please contact us to request a free copy via .pdf or hardcopy.  Insurance instruments offered through CutterInsure, Inc.

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