Are we heading for a recession in 2023? That seems to be the big question on everyone’s mind these days. People would like to know so that they can prepare themselves.
Fifty-eight percent of economists still say there is more than a 50% chance of a downturn in the next 12 months, according to a panel of 48 forecasters surveyed between February 3-10 by the National Association of Business Economics (NABE). That is about the same share as in a December survey.
However, just 28% expect the slump to begin in this quarter, compared with 52% who held that view in December. Instead, 33% predict a recession will start in the second quarter and another 21% say it will begin in the third quarter.
- Funny how these estimates keep getting pushed out farther, while the economy continues to churn forward.
The truth is no one knows if we are headed into a recession. More importantly, what does it mean for your money if we do?
Let’s look at some interesting statistics:
- Most investors fear the recession because they cannot stand seeing their money go down, and
- When their money goes down, it really goes down!
- Have you ever considered what makes the experience so painful?
- In most circumstances it is because investors are not properly diversified.
Take for instance last year when the market (S&P 500) was down 19.4%. According to Fidelity, average 401(k) balances ended 2022 down 23% from a year earlier. That is even worse than the market decline of 19.4%. These statistics indicate that the average investor is not properly diversified, otherwise the losses would be much less severe than those indicated in the Fidelity survey.
This is the reason we encourage our clients to have a War Chest as part of their overall allocation. The War Chest, which consists of cash and short-term bonds helps to limit the damage in years such as 2022. If we are to experience a recession in 2023, the War Chest will again be a critical part of your success and the main element that separates you from the averages expressed in the Fidelity study above.
Furthermore, the history of investing during a recession should give you some confidence to weather the severe ups and downs that characterize most recessions. See below how investing during a recession has led to very strong results.
Lastly, we are not here to predict whether or not 2023 will be a recession year. However, the long-term odds are in your favor for staying invested. As you can see from the chart below, you would have a nearly 3 out of 4 chance of missing out on positive returns in the stock market if you were to move your money in anticipation of the recession that may or may not come to fruition in 2023.
Investing in the stock market is not one step forward, one step back. It is four steps forward, one step back.
Do not let the one step back cause you to miss out on the four steps forward! Make sure you are well-diversified to limit the damage in years like 2022, so that you can take advantage of the inevitable up years that will follow.
It may be wise to reach out to a financial advisor to ensure that your investment portfolio is well-diversified.