🔎 Market Mysteries

Hey friend - welcome to the weekly deep dive into the most significant economic trends facing our lives and our planet.

Stick to the plan and prioritize your financial health. In a recession, it's essential to be even more mindful of your spending, savings, debt, and investments. The right decisions now can set you up for even greater success when the economy turns around. There are a few crucial strategies to remember.

For many of us, the word recession suggests a global crisis. The last two recessions were the most severe economic disasters of the last half-century. In 2008, the global financial system collapsed. In 2020, the global economy was completely shut down.

Not every recession is a financial crisis. Recessions are a natural part of the economic cycle. The economy grows, slows, and contracts. Just like all squares are rectangles, but not all rectangles are squares. We're in unprecedented times, so it's hard to say what comes next, but economists aren't really talking about an impending economic collapse.

The economy is still doing fine by most standard measures, but those measures have started to turn in the last few months. Consumers drive the economy, but high prices and borrowing costs have slowed spending. The low supply of workers relative to business demand will likely keep unemployment low, but layoffs have started rising, and it’s harder to find a job. Inequality is worsening. Even the biggest corporations have warned about a significant slowdown. If living costs come down and wages catch up, things could turn around, but it’s always best to pair optimism with preparation.

Make sure you understand your spending. The pandemic threw the global economy out of sync, leading to sporadic abundance and shortages. Prices, on average, may stop rising so quickly, but individual living costs could continue to prove unpredictable. Use tools that can easily track, organize, and predict your expenses like these.

If you hate budgeting, try just making one once. Think of it as a reference guide, not calorie counting. Knowing you want to keep your restaurant spending to $300/month can serve as a mental benchmark to help you make a responsible decision for that last friends meet-up at the end of the month (or not).

Increasing your income is critical to adapting to rising living expenses. It's not a bad time to ask for a raise. Workers around the country, across industries, have won massive pay raises through organized strikes and negotiations. With our aging population and inefficient immigration policies, the demand for quality talent will continue to exceed the supply of workers. You are a valuable resource, and companies will fight over you. People who switched jobs saw their wages increase 15% faster than those who stayed at their jobs this past year. Go out and get an offer, then weigh it against the benefits of job security. New, expensive workers could be the first to go if companies start layoffs. However, retaining workers is far more valuable than hiring new ones. So, that outside offer could earn you a raise if your employer counters. Beyond that, increased income doesn't only come from your job. Check out our resources for side hustles, cashback, giveaways, and passive income.

Build emergency savings. Amidst economic uncertainty, we need to be prepared for anything. We put aside at least 3-6 months of expenses in a safe savings account. Think about how many months you could go without income. The good thing about higher interest rates is higher-earning savings accounts. Many pay over 5% interest.

Pay down high-interest debt immediately. Rising interest rates mean our credit cards are getting more expensive and will take up a more significant portion of our income. That debt is like investing in reverse. It eats away at our wealth at a -20% rate that we can’t counteract by investing. Here are some tools we’ve used to help pay it off, consolidate it, or refinance it.

Improve your credit score. If you need to take on debt at these high interest rates, perhaps to buy a home or car, you must find other ways to reduce your rate. A high credit score can help do that. It indicates to banks that you're a more responsible, higher-quality borrower. The lower the loan risk, the less banks make you pay. There are free and efficient ways to build credit and improve your score.

The highest priority is ensuring you feel comfortable about your financial health in the short term before you start thinking about the long term. A potential recession shouldn't knock us off course if we’re ready to put away money for long-term growth or already doing it. Trying to time the markets is rarely a successful strategy. Consistency is key.

Understand the timeline of your money needs. Savings accounts pay 100x more than they did just a few years ago. A high-yield savings account paying over 5% is a very solid return with no volatility risk. Any amount less than $250,000 at a single bank is government-insured. The stock market could grow more than that (historically ~10%), but it could also lose a lot of money over the same period. We keep any cash we might need in the next few years in a savings account that pays at least 5% interest.

If our finances are healthy, our short-term cash needs are safe, and we can put away for at least 5-10 years, we’re constantly investing. That timeline is the most important thing. Investing is risky, but we’re prepared for it. Big stock market swings are normal. Each year, the market falls almost 15% on average but ends with a positive return 75% of the time.

Don't let your emotions take control; don’t try to time the markets. No one is consistently good at timing the market. Even if they think they are, they may not have compared their portfolio to one that stayed in the market.

Pulling money out of the market when our investments are down is one of the worst things we can do to our portfolio. JPMorgan looked at the growth of a diversified portfolio over twenty years and found that missing just the ten best days in the market cut the investor’s returns by more than half. Six of the seven best days immediately followed the worst days.

The best times to invest can often feel like the worst. Over the past fifty years, the average one-year return of investing at peak consumer confidence was 4%, while investing when consumer confidence was lowest returned 24% growth.

Remember that the stock market moves in anticipation of what will happen in the economy. Investors are buying a share of a company for its future growth and profits, not what has already happened. Remember the last few years. The stock market crashed in February 2020, well before we were even wearing masks, and soared while the economy was locked down. Last year, the market crashed, anticipating the recession, but the economy proved more resilient. The market could likely rally when the economy’s at its worst. There’s also the high likelihood of an unpredictable event throwing everyone’s plans out the window. Even though our economic predictions were pretty accurate this year, no one can see the future, especially with short-term market moves.

It's essential to automate long-term investing as much as possible. After figuring out how much we can regularly allocate to long-term investments, we set up auto-transfers into an investment account that automatically invests it. Our favorite investing platform is M1. Anyone can build a portfolio of anything they want, splitting it up by percentages instead of worrying about the math of trading. Then, we can auto-transfer and auto-invest regularly based on our chosen allocation.

More volatility creates more opportunity, but short-term trading is extremely difficult. It’s all about timing; if you’ve gotten this far, you know timing is tricky. Even the best investors in the world, with teams of analysts and supercomputers paid millions per year for above-average returns, rarely get it right. Over the last twenty years, less than 10% of portfolio managers were able to perform better than the average return of an index fund that simply holds shares of every available company. That number gets even smaller when you consider the funds that have gone out of business for poor performance.

That doesn’t mean we can’t pick winning stocks over the long term. Over the last 40 years, a third of all stocks have grown faster than the broad market average. Finding big winners in the stock market can be easier than the lottery. Over those 40 years, about 10% of stocks have been “mega winners,” growing 5x more than the index. Those are much better odds than picking the correct Powerball number.

When investing in individual companies, buying at a low price can make a big difference. Waiting for a few percent day-to-day won’t make a difference for a 5 to 10-year holding period, but in volatile times, we could see 30-40% swings in a single company’s stock price throughout the year. We monitor the scoops to know what’s happening and determine whether the price is down because of some new information that changes our perspective on the company’s potential success. If it’s not something company-specific, we’ll say thanks for the discount!

Remember, picking stocks is optional. By first investing in a diversified total market fund, we benefit from the average growth of all the stocks in the market. Those average returns are what 90% of professional investors struggle to outperform. Once we own every stock in the market, adding individual stocks simply means we’re increasing the size of our investment. We can identify which companies we believe in and buy individual shares that give us voting rights and direct ownership of the company.

Navigating a changing economic environment can be intimidating. That's why we're focused on making it as simple and easy as possible to understand what's happening daily and make decisions that improve your life. We'll keep curating the information, education, and resources you need to control your future.

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Keep building,

The Scoop Team