A recession is defined as a considerable decline in economic activity that is spread across the economy, and tends to last more than a couple of times. Kavan Choksi Wealth Advisor points out that while recessions are definitely challenging, they are also a part of the normal business cycle. Hence, it is prudent for people to prepare themselves for such situation to properly manage their wealth, remain financially stable and even use the situation to gain unique opportunities to build wealth.
Kavan Choksi Wealth Advisor discusses the approach to follow when trying to manage wealth in a recession
Even though economic recession is unavoidable, it surely is possible for people to weather the storm if they manage to anticipate the challenges early and start preparing for them. It becomes extremely difficult to predict what will happen next and when things will improve in a recession. Hence, it is vital that people are clear about their financial situation and wealth management approach.
As a first step, it would be prudent for people to take a close look at their spending habits and develop a plan for increasing how much to save. Building up an emergency fund would be useful in tackling future expenses that are not already a part of the monthly budget. These expenses may include unplanned costs incurred due to a layoff, shortage of cash, as well as events like an increase in food or gas prices. An emergency fund of about six months is likely to be adequate to help people deal with potential financial hardships. Moreover, during a recession, people who have access to cash would be in a better position to leverage investment opportunities that can improve their finances and build wealth.
As per Kavan Choksi Wealth Advisor, as one starts to increase their cash reserves, choosing to invest more in assets like real estate and stocks shall pay off in the long term. The key is to invest with a 10-year outlook. During a recession, one would have access to more assets for less money. It is common to find the stock market decline during such time, providing people with the chance to invest in shares of good companies at a discounted price. Between January and mid-October 2022, the S&P 500 index had declined by over 20%. While a short-term investor may see the 20% price drop as a loss, it does present an opportunity for the long-term investor to build wealth.
During a recession, it becomes all the more important for investors to continue with dollar-cost averaging. This would help them to keep putting funds in the market and autopilot things so that they are not constantly worried about the market conditions.
Watching the price of one stock is down, and then deciding to put all the savings into that stock would be too risky. When it comes to the stock market, an index fund which is a mutual or exchange-traded fund that tracks a market index such as the S&P 500 or Total Stock Market Index would likely to be the best place to start, especially for a newbie investor. Index funds allow for diversification and passive management which can be a huge advantage for an investor.
