Financial adviser explains how to prepare for a global recession

It’s hard to watch the news or scroll through the financial pages today without seeing the mention of an imminent recession sparked by one of the world’s superpowers defaulting on a mountain of debt and dragging the global economy with it. While this occurrence may eventually prove to be true, seemingly like death, predicting when the hooded fellow will come for you is near impossible.

A more effective strategy would instead be to consult a qualified financial adviser to explain how to best weather such a recession should it occur. The CEO Magazine has done the homework this time around by asking financial adviser Helen Baker some tough questions on what you need to know about a recession as well as what people in certain age brackets should prioritise during this financial predicament.

Beware the perennial doomsdayers

Every circle of friends has one or more of these. They’re the ones forecasting that a crash is coming and will try to scare others into following the same narrative.

"Don’t believe everything you hear," Baker says. "There’s always people forecasting good times or bad times and it’s just a forecast, so you never know what’s going to happen."

She backs up this view with the onset of the pandemic back in March 2020. Global markets were spooked and roughly lost 40 per cent of their value – and then pretty much bounced back immediately.

"I think no-one would have expected the returns on their investments in the past 12 months, even us advisers didn’t," she points out.

"The markets and how they respond are not necessarily what’s happening in the economy – they’re two different animals."

Baker explains that the outrageous returns made during that perceived downturn is proof that people shouldn’t always believe what they hear.

"In theory, you would have thought COVID-19 was all bad, everything’s going to crash, but all the markets have gone up around the world, including shares and property. We’re in a whole different world. The markets and how they respond are not necessarily what’s happening in the economy – they’re two different animals."

With fear and negativity being the media’s favourite fuel for recession forecasting, Baker explains that market turmoil is completely normal and should be expected.

"The global financial crisis came and everyone thought it was the end of the world – it survived. COVID-19 came, we thought the world would end again – we survived. These things do happen. It’s unrealistic to expect our investments and our property to go up all the time. They all move in both directions."

How much money you should have in the bank

Most people should have some cash savings in the bank during any economic downturn but the question is how much? In typical financial adviser fashion, Baker says it all depends on the following:

Whether you’re working
How secure your job is
How likely you are to lose your job during economic events
How much debt you have
What your commitments are
What other income or investments you have
Whether you’re totally reliant on your salary

As a result of these broad-ranging factors, it is difficult to give a definite cash savings figure for every person.

"Generally, I used to advise having about three months of expenses in the bank, so that’s your mortgage, bills and your fun money. This is what used to be reasonable," Baker says.

"But I think after the experience of COVID-19, some industries went into big trouble, such as travel. So you might need to have six months or more to be safe.

"I talk to my clients about the ‘sleep at night’ factor, so regardless of what the amount is, the real question should be ‘What is your sleep at night factor?’

"That is, if you lost your job today because of the recession and markets fell, what would you want in the bank? And for everyone, that’s different."

How much you should be diversifying your assets

Diversifying assets essentially refers to investing in different asset classes rather than having all your eggs in one basket (or your entire life savings in the bank). Baker highly recommends asset diversification across industries, countries and company sizes in order to minimise the personal financial impact of economic downturns.

"I’m a big believer in diversification. A lot will just invest in the top 10 blue-chip shares, but that’s just Australia, and we’re just two per cent of the world market. If you think about industries like health care and communications, where do they all reside? Overseas.

"So you have to think about a range of assets. One of the reasons people try to choose where they invest is because they’re trying to guess what will be the next winner. If you had money in travel, it would have crashed significantly. If you spread it across a range of investments and industries, you’re protecting your portfolio because some might go up and some down, and the losses in one area are evened out.

"It’s about treating it as an investment that’s different to gambling, even though a lot of times people treat investing like they would gambling."

Baker’s recommendations for asset classes include:

Local markets
International markets
Emerging markets
Fixed interest or bonds
Cash
Real estate and property
Environmental, social and governance stocks

These are primarily the key areas seen in the standard superannuation investment fund.

How long recessions last

Weathering the storm is a given for most during a recession. While preparation will distinguish the winners from losers, the length of an economic recession is also a crucial factor. However, determining this length of time isn’t straightforward.

"If you look at the GFC, it was a year-and-a-half before the markets got back to where they were," Baker explains.

"They talk about a double-dip recession, which is two consecutive quarters of economic contraction, but this is going to be different for different countries. During the GFC a lot of the Northern Hemisphere had recessions but countries like Australia didn’t.

"Recessions don’t need to be global which is why you want to diversify. While some countries aren't doing well, others might be."

Recession advice for young professionals

Assuming that this group has limited financial commitments, young professionals are primed for a stage of financial opportunity.

"The younger bracket is probably saving for a house but less likely to be concerned about super or immediate needs. They are also less likely to need the money from their super, retirement fund or investments, so these can be left to grow," Baker says.

"From a superannuation perspective, a young person can’t touch their super for 40 years or so.

"By nature, when prices drop people run away from it and start selling, but that could be the opportunity to buy in. So if there's a superannuation fund with dollars going in each month or quarter, they’re buying more of these units than they would if the price was high.

"It’s a mindset change that’s the same as investing in shares."

Recession advice for older professionals

Beyond middle age, people are more likely to be concerned about getting rid of debt as they’re likely to be earning more and their children are getting older. This means they’ll have a different approach towards their investments.

"Someone like a pre-retiree is probably going to be a bit more conservative than someone younger," Baker suggests.

"They can see the end of their working life and they should usually be debt-free by that stage, so they have surplus income for what they want to do with that.

"Beyond that, when you’re older and retired, you’ll see what you’ve got so you’ll be figuring out how to make this work for yourself while managing what you have."

Recession advice for investors

When it comes to recessions and investors, there’s always going to be some risks involved. The key is to have a strategic income plan.

"If you can have a lot of investments, be working a day job and survive off your income, then you can be less concerned about how your investments move since you don't need access to funds at the time," Baker says.

"Someone living off their investments and the income it produces needs to look at how much risk exposure they’ve got, and how long can they survive in a recession before they’re forced to start selling investments. And Murphy’s Law says that if you’re forced to sell an investment or asset, you’ll never get what you paid for it. So you’ve got to be able to strategically set everything up to work together."