Investing & Recessions

The problem with recessions is that earnings decline, and P/E multiples decline both at the same time. When these two metrics decline at about the same time, a significant market decline (drawdown) typically occurs.

In the post WWII era, the worst drawdown occurred between December 2007 and June 2009 when the S&P 500 declined -57%. The second worst drawdown, a -49% decline, happened between March 2001 and November 2001.

In sports, top athletes use a technique where they visualize themselves winning a particular competition. Try using this method to test your investment risk tolerance. Visualize what a 57% decline would look like on your retirement portfolio.

Sure, markets have always bounced back eventually, but remember that a -50% decline requires a 100% return just to get back to even. A -57% decline requires a +132% return to get back to even.

Conversely, a -10% decline only requires a little over +11% to get back to even.  So, the concept of diversification is your ally in times of economic recessions and bear markets.

Diversification is especially important when it comes to trying to protect an investment portfolio from the kinds of declines or “drawdowns” that can significantly alter your goals and objectives.

For starters, make sure you fully understand your own risk tolerance and the impact that higher equity allocations may have on your long-term goals. If you’d like to learn more, click here and let’s begin a conversation.

 

Disclaimer
This material is provided by Schmitt Wealth Advisers for informational purposes only. Schmitt Wealth Advisers does not provide tax or legal advice, and nothing herein should be construed as such. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product.  Opinions expressed by Schmitt Wealth Advisers are based on economic or market conditions at the time this material was written.  Economies and markets fluctuate.  Actual economic or market events may turn out differently than anticipated.  Facts presented have been obtained from publicly available sources (unless otherwise noted) and are believed to be reliable.  Schmitt Wealth Advisers, however, cannot guarantee the accuracy or completeness of such information.  Past performance may not be indicative of future results.

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