If you’re a Game of Thrones fan, the phrase ‘Winter is Coming’ should be familiar to you. If not, it’s simple a warning of an impending season of change, difficulty and heartache. While the proverbial ‘winter’ may not be coming in real life, there’s another threat looming over us today, one that causes great fear and warnings: recession.

A recession is a natural ebb of the economy; a period of time in which things slow down a bit. The opposite (which we’ve been experiencing over the last decade or so) is a growth market, things are good, companies are hiring, business booms, investments increase in value (appreciate). Governments will use various tools (i.e. monetary policies) to soften the blow of both cycles, as steady, predictable change is often best. However, as we’ve seen in modern history, there will be good times and there will be some bad times. Sometimes a recession turns from bad to worse, in the form of a depression, like it did in 1929 and 2008. Often though things won’t get that bad, and after a few years of bad, things will turn good again.

In today’s polarized media environment, it’s often the ‘shock value’ of articles that gets the most clicks, and therefore the narrative can get a little extreme. There are many out there that cry out saying recession is near, it’s going to be terrible and you should head for the hills. I’ve heard more and more of this as of late, and wanted to share some of my thoughts on the issue. Quick disclaimer, I don’t have the right answers (I doubt anyone does), and truthfully am not sure my course of action is best. I’m generally optimistic and am not a doomsday thinker. However, I try to make the best decisions I can given the information at hand, and try not to look back too much. Let’s jump in, winter is coming!

A recession will come

If you listen and read the articles out there, you can find a variety of predictions for when recession will hit. Some say next year, maybe the year after, maybe 5 years, or maybe tomorrow when someone on the world stage does something incredibly stupid. There are charts you can dive into, various indicators and models that you can follow to try to predict when it’ll come. Truth be told, no one actually knows. Sure charts, indicators and models are helpful, but they’re based on past events, and are only predictions. Sure what worked 8 out of the last 10 times should work this go round, but it might not. I personally don’t think you should pay too much attention to the timing of when it’ll happen and rather focus on the fact that it is likely going to happen sometime. Sure if you knew with certainly the high point you could sell your investments, wait until the low point and re-buy it all back at a discount. However, timing I’ve found to be a slippery slope and a bit of a higher risk endeavor. Don’t worry too much about when it’ll occur, and make longer term plans. Leave the charts for the ‘experts’ and don’t stress yourself out with something you can’t know for certain.

What I’m not going to do

Before my big reveal of my plan, let’s explore a few other options and I’ll talk about why I don’t think I’ll follow that path.

The first option would be truly to head to the hills, i.e. sell most of my investments and hold onto cash. Keep my cash in low risk CDs or savings accounts, where it’ll be safe from a crash. I don’t like this strategy because it relies too much on timing and will likely take a lot of work and research, and add a ton of stress to your life. You undoubtedly won’t sell at the highest point and won’t buy back at the lowest point. You’ll keep watching and waiting and will be on the sidelines fearful. When things look to be the bottom (i.e. ‘It can’t get worse than this’), you’ll continue in fear of when to get back in. Heading to the hills will add stress, and be quite risky hopping out and then back into the market.

Another option is to play defense. You could go back and study past recessions and try to figure out what does well in the bad times and invest in those areas (i.e. people always need food/groceries). Let’s be real though, you probably don’t have the time or knowledge to do that research and would have to trust other experts, which is only as good as how much time/knowledge they have. You may also buy some gold or other commodity to ‘hedge’ against the downfall. While playing defense is a good strategy, especially in rough times, I’m nervous about the research required and the effort that would go into executing these moves. The average young professional probably doesn’t spend that much time working through their investments portfolio in good times, so I can’t expect them to in bad times. You’ll be worried about keeping your job amongst other thing, and jumping into defensive investments is not something I see many people devoting the appropriate amount of time and research into.

If you knew when the recession would start and end, following either strategy would be ideal. You could be out of the market right when things are getting bad and get back in when they turn good again. However, no one knows for certain and the level of effort required by both probably isn’t something we’re willing to do right.

What my thinking is

I’ve given a lot of thought to my approach for surviving ‘winter’. One thing that really sticks out to me is some insight I got from my 80 year old grandma. Sweet Nana Money Finance was born in the late 1930’s, so she missed the Great Depression but certainly was brought up by parents that had been though it. Her and my Papa worked hard throughout their lives, and by saving and investing, were able to build up a nice retirement fund. In 2008, the latest recession/depression hit and Nana Money Finance didn’t do much at all. She didn’t head for the hills and didn’t shift her investment strategy around that much, despite being about 5-10 years from retirement. Her (along with everyone else) investment balance dropped probably 30-40% during that time and was undoubtedly tough to stomach. She’d worked her whole life and it certainly wasn’t easy watching it evaporate. However, she’s been through a lot in her life, and decided to ride it out. She stayed the course with her investments and was able to weather the storm. On the other side of the 2008 depression, she not only saw her 30-40% come back, but also (along with others) saw it grow. She got back every penny she lost and got more. Sure had she headed to the hills (cash) and bought back in at the low point she could have been more rich, but she’s not an investment professional with timing insight, and neither I am, and likely neither are you. Nana Money Finance is also an optimist (maybe where I got it) and figured things would get better…and they did.

In light of this, I’m not going to do a whole lot for this upcoming ‘winter’. I’m going to keep my investments where they are, and I’m going to keep contributing to my retirement at the current level I’m at (15%). If things go down, I’ll lose some money for a while, but as I’m continuing contributing to my retirement, I’ll keep buying the lower it goes, i.e. getting good deals on the falling price. I’m in it for the long haul and 2055 is a ways away. If history is any indicator, things will get better after they get worse. I’ll make back my losses and won’t have to worry as much about jumping in/out or trying to time things, I’m going to stay focused on my work/career and let the ‘experts’ and the conspiracy theorists get their panties in a wad worried about everything.

I am however going to slow down my medium term investing and keep some of that in. I break my investments into 3 categories: short, medium and long. My short term investments are all cash, as I expect to use that money in the next 1-12 months (buying a house, car, other big purchases). My long term investments are in my retirement account and I’m not going to touch/need that money until I’m 60+. That’s staying the same thru winter. My medium term investments are the in-between, money I don’t need now but will potentially need before I’m 60+. That money is invested in mostly index funds (I do own a few stocks as I enjoy the research and picking process). I contribute a few hundred dollars into that category each month. As a recession is likely going to occur, I’ve found that it might be wise to keep a little more cash on the sidelines, to be able to scoop up more index fund shares when things are bad (but also cheap). I’d say I’m cutting my medium term investing probably by 50%, continuing to buy more index fund shares but also keeping a bit more cash on the sidelines.

That’s my current approach, in it for the long haul and deciding that I’m not smart enough to time the recession and will focus on other areas of my life that I am truly in control of. I hope/expect that to be a little less stressful and that it’ll allow me to tune out some of the negative noise that can get depressing after a while.

Why my strategy may be different than yours

For a little context on where I’m at in life, currently married with both myself and Mrs Money Finance working full time jobs. We own our home (well the bank owns most of it but let us live there while we pay them back over the next 30 years). Our income level is comfortable and we’re debt free aside from the house. We’re able to devote a large portion of of our income to savings/investments, building up our investment portfolio. We’re certainly not rich and worry some about the future.

Things might look a little different for you, depending on where things stand in your life. Perhaps you’re not able to save as much and more of your income goes to daily necessities or paying down debt. Or perhaps you’re doing quite well, and have more to lose. In either case, there could be a better move for you. Perhaps you’ve got enough to where you can take some risk and try to time the market a bit more. You may have a financial advisor who is able to help play some defense. Or perhaps you can’t afford to lose what you already have and should sell some to protect against loss. I realize that there’s not perfect solution to winter, but hopefully some of my insights help!

Spring will come again

I’m able to remain optimistic and not play too much defense because of my belief that spring will come again. Sure a recession is tough and will be mentally challenging to keep our spirits high, but in looking at history, things will get better again. If you look at the stock market (where I keep my investments), it’s always come back and grown more after a recession. I believe it will do the same again. If it doesn’t, truthfully we’ll have bigger problems to worry about and the balance of your investment amount will be the last thing on your mind. Instead surviving, getting food and maybe killing zombies will be more pressing if thing really get bad. I don’t expect things to get that bad, and expect for the market to keep repeating history, getting bad then getting better.

Best of luck this winter! As I mentioned, I definitely don’t have all the answers and don’t actually know if my plan is best. I’d love to hear your thoughts and how you’re approaching the upcoming ‘winter’, i.e. recession.