Action plan for Next recession

[saildawg]

After seeing many posts on here about the next recession, I wanted to facilitate a discussion on an easy to follow action plan for when it happens.  Now, first and foremost I have no idea if and when the next recession is coming, but having not been practicing during the last financial crisis I wanted to be prepared.  I am a big fan of JL collins book the simple path to wealth, and it has given me great perspective on the mentality needed to be an investor.  It has given me a good long term approach to building wealth through index investing.

This plan is geared toward my needs, as a youngish (5 years out of residency) physician with goal of financial independence (but not necessarily retire early) in 5 years.

1. Don’t panic and sell now.  Remember the stock market always goes up , the only way to lose money is to get out of the market now.


2. Take the opportunity to tax loss harvest now in your taxable account


3. Look at your asset allocation, it likely needs re-balancing into more equities, try and do this in a tax efficient manner.  (Note for those of you with high cash allocation. this would be a time to put it to use)


4. Now is the time to really save your income and try to invest more into the stock market.  It may seem counter intuitive, but this is where you can buy at a discount. 


5. Once the storm is ridden out (which can take years) re-examine your asset allocation in relation to your time frame to retire.

I welcome any additions or criticisms.

 

[Peds]

1- look and hum, thats interesting. good thing i have an IPS and have an AA that is fit for my need, ability, and willingness to take risk.

2- finish coffee.

3- finish the news.

4- do nothing.

5- oh, i hit a rebalance band? or oh, its time to rebalance based on my IPS. ok, do that.

6- refill coffee.

 

[MPMD]

This thread is going to be far more interesting to me if we hear more from senior forum members about what they actually did and experienced in 2008 less about how a bunch of finance nerds who take the time to post on a forum for high income professionals won't even notice a recession because their IPS is so tight.

Color me skeptical of the attitude if not the activity or lack thereof.

[saildawg]

Peds wrote:

1- look and hum, thats interesting. good thing i have an IPS and have an AA that is fit for my need, ability, and willingness to take risk.

2- finish coffee.

3- finish the news.

4- do nothing.

5- oh, i hit a rebalance band? or oh, its time to rebalance based on my IPS. ok, do that.

6- refill coffee.

 

Click to expand...

Yes I agree, this is basically follow your IPS. Good call, I suspect not everyone on this board has one.  They should

 

[saildawg]

MPMD wrote:

This thread is going to be far more interesting to me if we hear more from senior forum members about what they actually did and experienced in 2008 less about how a bunch of finance nerds who take the time to post on a forum for high income professionals won’t even notice a recession because their IPS is so tight.

Color me skeptical of the attitude if not the activity or lack thereof.

Click to expand...

I agree that people who experienced the last few recessions should tell their experiences and what they did.  Even JL Collins in his time panicked and sold in the 1980's.  Certainly easier said than done, but there is certainly value in trying to prepare your action/response.

[G]

I rebalance my 401k 1-2x per year. When buying new, I add to the buckets that have been hit hardest (i.e. Europe vs Pacific). This doesn't change in the next recession.

As I've commented here before, in the GFC, I was looking under the couch cushions for money to buy stocks (picking up shifts, seeing extra patients/staying longer). At this point in life, I'm not as driven. I'm curious how low the market needs to go to prod me to work more.

[ENT Doc]

Well, we know what Crixus will be doing:



As for the validity of an action plan vs hearing perspectives of those who went through it I think both are of value.  The behavioral failures of the past should show future generations what that action plan should look like.  Whether or not we all want to learn from history or fall victim to our emotions is our own choice.  But having a plan such as saildawg laid out or that Peds advocates for in an IPS is extremely reasonable if not the only thing (aside from collective encouragement on this forum) that forces someone to make logical decisions in the setting of utter chaos.

[Bmac]

Well I was out of residency and investing during the last recession. And I just kept maximally contributing to our 401ks and taxable accounts maintaining our desired allocation. Tried to basically ignore the large paper losses. But, of course, our investments were a fraction of what they are now and we were obviously much further from retirement. So mentally I think the next big recession will be harder and much more depressing , but I’m mostly optimistic that I can stick with our overall plan. Also, since we hope to retire in about 3 years, we have been building a large cash reserve to mitigate any sequence of return risk that a recession would cause.

[CordMcNally]

As another younger attending, my plan really isn't any different than what I'm doing now. I typically use new contributions to keep a running tab of being close to my asset allocation so I guess I may have a need to re-balance a little and do tax lost harvesting. I may even try to up my savings to take advantage of the sell. I suspect this plan is much different from someone 2-3 years from retirement.

[bean1970]

we did nothing different in 1987 (probably the most dramatic), 2003 was it?, 2008, etc...never paid attention and dollar cost averaged the same amount into all our retirement accounts every single week/month (employer, individual and personal) whether the year was 1999 or 2011.  we didn't do any rebalancing, reallocating, re-anything.

[saildawg]

This is looking through 2012, at what point has the market not always gone up for a investor with long term horizon?  Nothing wrong with being contrarian, but not sure we were sold a bill of goods

[VagabondMD]

MPMD wrote:

This thread is going to be far more interesting to me if we hear more from senior forum members about what they actually did and experienced in 2008 less about how a bunch of finance nerds who take the time to post on a forum for high income professionals won’t even notice a recession because their IPS is so tight.

Color me skeptical of the attitude if not the activity or lack thereof.

Click to expand...

I have a guest blog coming up soon (8/16) on the Physician on Fire site, discussing how I reacted and responded during the last two bear markets (2000-2002 and 2008).

Needless to say, it's really easy to profess to keep your cool and bravado in year nine of a bull market, and quite a bit different when not only are your investment accounts dropping month by month, but there is a lot of negativity around you: people around you losing jobs, local businesses shuttered, people being forced to sell their homes, friends' kids having to transfer from out-of-state colleges back in state (or maybe even take time off), etc.

In previous downturns, physicians were largely insulated from the recession (expect fields like cosmetic surgery and other truly elective disciplines), but our incomes did contract some as people delayed elective and unnecessary encounters. As many more employed, insured people are in high-deductible plans than 10 years ago, I would expect that physician incomes are at greater risk. The dude sitting around watching television, experiencing a cramp in his leg for 20 minutes or so, won't be as quick to rush to the urgent care center to check it out (I saw useless x-rays on two of these last night).

[Dr. Mom]

In the Great Recession we continued to dollar cost average.  Every further 10% drop in the S&P, I increased our stock percentage by a few percent. I kept a sticky note by the computer with the S&P decreasing in 5% decrements from its high.  When it hit the right level, I invested more.  The highest I got to was 85% stock and 15% bond.  I wasn't following any online forums back then so I wan't caught up in any fear mongering. I didn't know I was supposed to be scared, so I wasn't. I had been through 2001, 2004, Enron, etc. already.  The more the pundits on the news were freaking out, the calmer I was. It was similar to the calm I feel in the ER during a code or trauma.  As physicians we had stable jobs so I viewed it as getting stocks on sale.  I like a good sale.  As we are closer to retirement now, I don't know if I would increase our stock percentage as much as I did back then but I would consider it if the market was down 20-30%.

I like to think I could continue to post and be a calming voice in the next recession, but we'll see.  I would advise each of you think about how you would handle watching your portfolio fall and write down now what you would say to yourself to stay grounded.  Some of the best advice I saw on Bogleheads when I was reading some old posts from the Great Recession was from Rick Ferri.  He was advising people not to sell out all at once but to drop their stock percentage in 10% decrements at a time until they were comfortable and then stay at that new allocation long term.  I used a version of his advice a few years ago when I was feeling very nervous still being at 85/15 and dropped us to 70/30.

Hope my thoughts/experiences help you consider how you might handle the next recession for yourselves.

[Sajimone]

I've been waiting a long time for a recession... begged the market gods to bring one of these financial blood baths while I was still young with many years left of compounding growth.   Hope its finally here... hope it wipes out 50-90% of what I've invested... so that I can finally smile and wave... and maybe invest some more!   when everyone is greedy.. get nervous.   when everyone is nervous... get greedy.

[CrockettsRiver]

I remember both 2001 (med student, minimal investments) and 2008 (significant invetments) well.  We are lucky, as Vagabond said, that our jobs are relatively secure and income pretty safe.  We didn't change our asset allocation.  We were fortunate in 2008 that we didn't need to move around that time.  But it was scary seeing people lose jobs, wondering if we were on the verge of a real economic catastrophe...

My plan, as others have said, is to ride it out, buy some more stocks on sale.  Turn off the news if it's too unnerving (a good strategy in general, I find).