The Risk of Recession
Confucius wrote, "For one word a man is often deemed to be wise, and for one word is often deemed to be foolish. We should indeed be careful what we say." There is a great deal of talk these days about whether we are headed for or may actually be in a recession, a word that may invoke fear in people. As we read some of the doomsday reports from the media, you would think that this is a once in a lifetime phenomenon that would affect our lives in such a way that we may never recover. The fact is that recessions occur from time to time and are an integral (some say necessary) part of the economic cycle. In fact, the excessive reporting may actually affect the behavior of many consumers and contribute to a recession. We are not economists and cannot predict the future, and so we have no way of knowing whether we are in a recession or if one is looming. The so-called experts can’t seem to agree. What is relevant, of course, is how a recession may affect us. Like many phenomena, how we react is very important.
Fear of recession may frighten some because it will probably be accompanied by stock market declines (as we have seen this month). And that brings us a word that is even more highly charged than recession - risk. In fact, many people will associate recession with risk. Think of what the average person visualizes when he or she thinks about risk. Webster defines risk as "the chance of injury, damage, or loss." No wonder so many people are "risk averse." Who wants to expose their money to such catastrophes? It would be a mistake, however, to confuse risk with market fluctuation, particularly if it affects your behavior. Many things in our lives are subject to fluctuations. The weather fluctuates, prices fluctuate, performances of our favorite athletic teams fluctuate, and, yes, the stock market fluctuates.
We need to define risk for what it really is and distinguish it from fluctuation. The greatest risk people face is running out of money while they are still alive. Or, not reaching the goals that are very important to them, such as educating their children, traveling, purchasing a vacation home, donating to their favorite charities, etc. Fluctuation may be what they encounter along the way, but the real risk is in not earning a large enough long-term return to do everything they want to do in life. And reacting to market fluctuations by abandoning a sound investment strategy because stocks have experienced a temporary reduction in value can certainly make things worse. So let's define the ups and downs of the market (whether caused by fears of recession, sub-prime mortgages, the end of the real estate “bubble”, or other things over which we have no control) for what they really are - the fluctuations one will probably encounter while on the road to reaching goals.
As financial life planners, it is our duty to help you achieve your goals and to provide advice for those things we can control (such as how much you save and spend, helping you get clarity about what is most important to you, keeping you focused on your long-term dreams and goals, etc.). We know that we have no control over market fluctuations. When we adopt investment strategies for our clients, it is with this in mind. And our disciplined approach does not overreact to temporary market conditions. Mark Twain wrote, “The difference between the right word and the almost right word is like the difference between lightning and the lightning bug.” When we think about recession, “risk” may be the “almost right word”, but fluctuation is the right one.