Q. I keep hearing that we are headed for a recession. This makes me very worried about my 401(k). I have most of it in stock funds so I could lose a lot. What are the odds of a recession? — Ned in Viera
A. Ned, given all the attention paid to the prospect of a recession, this may be hard to believe but predicting a recession is not necessary for investment success. Further, trying to predict such things may not be good for your mental health.
Identifying a recession isn’t as easy as you might think. Because several important bits of economic data take time to compile, no one is certain when a recession begins and ends until after the recession has begun or ended.
To be sure, the health of the economy is important for many reasons. When the economy is strong, more people are employed, and more businesses turn a profit. As an investor in diversified stock funds, you own a piece of a lot of those businesses. It makes perfect sense that economic issues garner a lot of attention from the investing public, the media, and politicians. However, the markets simply don’t behave the way that attention suggests.
While the two sync up from time to time, the relationship between the economy and changes in stock prices is not strong. If you have been investing in financial markets for any length of time, you have seen many instances where the stock market behaved in ways that ran contrary to the health of the economy. Even if you knew the exact start and end dates of a recession ahead of time, it would not help you predict market moves. We have seen bad markets in good times and good markets in bad times.
There are several reasons for this lack of synchronization. One is that markets are “forward looking.” This means the market fluctuates based on the consensus of what market participants think the future will hold. This is the most common intuitive explanation for why markets often rise when the economy is not doing well. It rises because enough market participants think things will improve. There is no announcement made or horn blown to signal that the consensus has turned positive, it just happens and often happens quickly.
The COVID crash and subsequent recovery is just the latest example, albeit one of the most dramatic. Markets started going up in March of 2020 and rose quickly even as lockdowns were imposed, economic news was getting worse, and the consensus was it would be two years before a vaccine was ready.
Our clients run the gamut between conservative and aggressive. After 30 years as a financial planner, I can tell you it doesn’t matter if the client has a portfolio of no stocks or all stocks, there is a very high correlation between watching news and being stressed out about markets. The financial media is in the business of selling ads. They have a steady stream of data to dissect to gain your attention. It can be fascinating viewing but the short-term orientation is rarely helpful in making good decisions.
One of the bedrock principles of successful personal financial management is to focus on what you can control. Ned, you can control your intake of news, if you so choose. Instead of getting sucked into being in the short-term prediction game, commit to taking a longer-term view.
The issue is not whether markets will be volatile in the future. Markets have always been volatile and there is no reason they won’t continue to be. The issue is are you confident you will take smart actions when that occurs? With a good plan you should learn to expect, not fear, volatility and you should be able to act with confidence even as the noise around the volatility grows.
Dan Moisand, CFP®, is a past national president of the Financial Planning Association and has been featured as one of America’s top financial planners by at least 10 financial planning publications. He can be reached at www.moisandfitzgerald.com or 321-253-5400, Ext. 101.
This article originally appeared on Florida Today: Recession talk worries me: Should it affect my 401(k) investments?