July 2025
While no one can predict the next downturn, they walk through three key steps you can take to feel more confident, no matter what the economy throws your way.
Tune in if you're interested in…
• Knowing how a recession might impact you based on your life stage
• Learning the “three-bucket” approach to financial security
• Building a resilient investment strategy that prioritizes income
• Stress-testing your retirement plan for unexpected events
• Feeling more emotionally prepared for uncertainty
Watch previous episodes here:
Ep. 146 How to Talk to Your Children About Wealth
Ep. 145 The Case for Gold: Wealth Protection in Uncertain Times
You know, Sophie, I find it interesting that, you know, as the economy has slowed down a little bit. I mean, even Sasan, today in our investment meeting, was talking about, you know, student loan defaults, credit card defaults, car loan defaults, and sort of the economy feeling some cracks or pressure. It sort of veered into this conversation about like, what is the recession?
What can people do? And so like, I'm excited to have this conversation with you today. I'm not saying that like, we're in a recession or we're going into one, but, you know, recessions are extremely normal. I think Ian did some research recently that typically, if you look back over time, the US kind of experiences a recession once every six years.
Here we are in 2025. And we really haven't had a big recession like the 2008 financial crisis. And some time, obviously, we had a slowdown in COVID and a little bit of a slowdown in the last few years, with higher interest rates. But this whole recession talk, if the economy's really slowing down, is an important topic for us to have.
Let's start by defining what a recession is. So a recession is a slowdown in the economy and is typically defined of two negative quarters in a row. And we're not seeing that. But if we are potentially going through a slowdown in the economy, I mean, what do you think investors should do to protect themselves?
Well, a number of things. I think first of all, it's helpful to define, you know, what are the fears? And I think, you know, there can be many types of fears, but two main ones we hear from clients are one, those people are, well, working, fear potentially you know, about losing their jobs so their main source of income to support their families.
And secondly, you know, people who have investible assets worry about significant declines in the value of their portfolios and all the angst that creates about, you know, what may happen to their retirement down the line over the long term. So even if these, don't pan out, people have these fears and they need to be addressed, and we need to discuss them with our clients to see what can be done, if anything.
You bring up a really good point, though. A recession affects all of us a little bit differently depending on the life stage that we're in. I'm never rooting for anything to go bad. I'm very much an optimist. But like, if we were to go into a recession or a decline and my stock exposure went down in value, I'm still contributing and saving, assuming that I don't lose my job.
And so I'm not that upset if we were to go through an experience like that. But, you know, for people that are in the accumulation phase, it affects them much differently than if they're nearing retirement or in retirement. Let's talk a little bit about that. I love your perspective on that.
Sure. So people who are near retirement, you know, may be there just a few years from retirement. And that's a big, you know, goal of theirs to, you know, stop working and start enjoying their lives without having to, to do a job. So their worries might be twofold. One, you know, losing their jobs and making that loss of these last few years count for their retirement plan.
And secondly, they worry a lot, potentially about a huge decline in the value of their portfolio. And as we know from established research, you know, if at the start of retirement, your portfolio value declines a lot. It's much harder, down the line to catch up, you know, on good values, to support your lifestyle, compared to, you know, early retirees or retire at a time when their portfolio value is higher.
Yeah. That sequence of returns risk is kind of what you're alluding to. Somebody retires. And then immediately, we go through a recession or their assets, you know, lose some value because there's the decline in price. But it's critically important because now all of a sudden, they're relying on those assets for the income. And so that's where that sequence of return risk can really come into play versus maybe somebody that's been retired for a long time.
Yeah. That's fascinating.
Yes. And what's happening is that even if these people, these free retirees, have a solid plan in place, certainly, you know, they worry about different things. So one of them is, you know, if I lose my job now, two years from my targeted retirement date, should I get a new job or, you know, can I, do well long term without a new job?
So that requires some, you know, thoughtful analysis and also, you know, will I have enough, you know, assets to support my needs and the kind of life I want to have, you know, in my old age.
So when you think about, like, giving somebody advice in terms of what they can do to help protect themselves. Obviously, there are some things that are out of our control. If we're working for an employer as an employee, and that company struggles because of the cyclicality risk of recessions or, how the business does I can't necessarily control my fate as opposed to keeping my job.
So, you know, we talked a little bit about making sure that you have an established emergency fund. What are some other things that they can do?
So, you know, the emergency fund, matters a lot. But what matters is to be prepared. And so that's, you know, really the bread and butter of what we do as a financial advisory firm is, you know, it's basically twofold. One is to help our clients have, develop a financial plan. So financial projections and help them manage and mitigate, you know, the foreseeable risks, and the unforeseeable risks.
And secondly, the overall design, an investment portfolio that, meets their goals and has a number of characteristics that, you know, will help them be resilient. I know we can get into that more.
We talk a lot about diversification here. We don't feel like stocks and bonds are sufficient for diversification. And obviously, that's one of those levers that people can control. It's how exposed they are to the overall market and how a recession might impact them. When I think about protecting yourself from a recession, obviously, there's the emotional side of it.
How that affects us might be different depending on the sector we're in, whether or not we're tired or we're working, or how it affects our family or loved ones, and whether or not we need support. But I always go back to that simple bucket approach, like bucket one: I've got an emergency fund, and it's enough to last for 6 to 12 months of my basic living expenses.
I feel pretty good. Then in that second bucket, I need income that I'm going to live off of. So that could be Social Security, pensions, my investments. I want to make sure I have enough assets in that bucket to generate the income required for me to live the life that I would like to live. And hopefully, there are diversified streams of income.
And then whatever's left over, it can go in that growth bucket, because that growth bucket can do what it needs to do. It can go up, it can go down. But I'm living my life because of the income from bucket number two. And I've got the safety net of the first bucket. I just I like that approach a lot.
Yes. And what you're touching on is the fact that, you know, good preparation matters. And doing that early, you know, whether there's, there are fears of recessions or not. I mean, as you stated at the beginning, you know, recessions are part of the normal economic cycle. And it very often. But what we do with clients I love doing is be prepared, you know, in good or bad times and have a resilient portfolio that will sustain them.
Whether, you know, at times, you know, sour or not.
Yeah, I know that you are really passionate about the planning aspects of stuff, especially as it relates to the financial plan. Talk to me a little more about the components of a financial plan, the power of what it can be able to do, and maybe the scenario analysis. Talk to me a little bit about that.
Sure. So, you know, one of the key things we do is, have discussions about, you know, our client's goals, not only the financial goals, but the life goals, how they want. You know, we kind of also a discussion about the future. Not everybody's comfortable with that initially because that's the first step is project yourself, you know, five, ten, 15 years from now, it doesn't have to be very detailed, but try to see the kind of like you like to leave.
And then we have a process where we discuss, you know, how can you assign numbers to that kind of life size? You know, you kind of compare it to what you do today and that's your, your baseline. And then, you know, make a few tweaks and project into the future. So you, you project your income, you project your potential expenses, and you look at specific sources of income as you touched on, such as secure Social Security and pensions.
And then you add, you know what, how much you need from your portfolio to live a good life. So that's how you develop your projections. You know, you, you design, you know, an initial portfolio and initial growth rate for that portfolio and see what happens, you know, do you generate surplus cash flows and can you, you know, ensure that your baseline, you know, allows you to leave until potentially 100 years old, you know, if you have them in your family.
Yeah. So that's your best plan, and it needs to have some, you know, be reasonably conservative so that you have a degree of comfort, you know, about it.
Yeah. So when you're projecting sort of forward returns, we're very conservative in the number that we use because you can go through a period like 2000 to 2010 where US stocks were flat for that period and didn't provide much growth. But then you could have other decades, right?
So it's very much a long term approach and looking at long term returns and, you know, it's never a precise exercise, but it's just a way of framing the future in a way that can be helpful. So once you've done that and everybody's comfortable with the baseline, you know, you introduce, some stresses to the plan, which can include, you know, recessionary periods.
And what's really neat is the way we do things at Morton Wells is that, you know, we have less exposure to stocks in general. So, yes, we build in, you know, scenarios where the stock market goes down significantly. But the impact we see on future cash flows for our clients is much, less than it would be, you know, for other types of portfolios.
Yeah. Even a few years ago, when interest rates rose from zero to kind of where they are today, the US stock market was down close to, I don't know, 18 to 20%. Meghan's gonna get on me for not knowing that exact number. But I like to speak in general terms. So 18 to 20%. A lot of our clients were really flat for that year, even though stocks and bonds lost value.
You're talking about 2022.
Yeah, 2022 because of the diversification that we had and the fact that we have less stock exposure than a lot of other places. We have it for a number of reasons. I mean, we think valuations and stocks across the board are, a little inflated. And we have other tools that we can use to kind of generate the income and the growth that clients need to, to provide that diversification.
So you're right in the sense that running a financial plan is one extremely important component, because you've got a basic understanding of the assets that you have, the income sources and what that projection looks like. But we can model in the impact of a recession for clients at different times or stages. And on top of that, you know, other unexpected life events, whether it's a health event or long term care.
And, and I love having the plan because once you have it, it's pretty easy to update it every year or two.
And also another aspect that's, you know, another lever we have is that, you know, we look at expenses, projected expenses pretty closely and have, you know, discussions with clients about, you know, what are the essential expenses that they foresee and what are the ones that, you know, they could do without if that was needed? Yeah.
So that's, you know, it's an also built in reserve effectively where, you know, maybe some travel, big travel plans with a family can be, you know, brought back maybe to domestic trip trip instead of an international trip or can be pushed back to you next year or the next year. So, you know, it's very much an ongoing process, this financial, financial, plan, process, planning process, we do it once, but we keep looking at it and fine tuning it as needed.
So that's when, clients come back with, you know, being fearful about what can happen. Yeah. You know, we can go back to that plan and say, well, let's look at the resilience of your financial plan.
Yeah, it can make it will help us better determine what are the right investment mix. Not only that, you need to have in order to, you know, live the life that you want, but also to protect you from you know, how a recession might, might hurt you. And so I guess just to summarize today, and you got to keep me honest with this, there's really three things that people can do to kind of focus on protecting themselves from recession.
Number one, it's having a sufficient emergency fund or access to money in the event of an emergency, because we don't want to build and build up credit card debt. Number two is, is creating a financial plan, understanding how much you need to save in order to get to where you would like to go. And if you're currently retired, you can model how a potential recession affects you.
And then the third is the investment strategy. It's making sure that you've got the diversification and the income-generating from your investments that you need. So that way, if we were to go through a recession, hopefully your income stream hasn't changed. So your life doesn't need to change.
And what's awesome is that you do that, you know, in good times. So you're ready, you know, when the bad times come and you're prepared and you get a lot of, peace of mind, you know, from doing that. Yeah, that's a reward, I think, for us when we do that work with clients.
That's a really good point. And you talked a little bit when we were doing the prep meeting about the financial psychology of a recession and doing this during good time. So that way, you were prepared in case something were to happen. You're emotionally going to be able to handle it a little bit better. Yes. Yeah. So thank you so much.
You're welcome Chris. That was great. Thank you.
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