Inflation is spiralling; the stock market is plunging and some supermarket shelves are bare – so are we headed for a recession sooner rather than later? What can you do to prepare?
The Reserve Bank of Australia (RBA) recently lifted interest rates by 50 basis points – the biggest jump in 22 years – in the latest in a string of economic indicators predicting a recession could be just around the corner.
As a quick refresher, an economic recession is defined as a period of significant decline in economic activity, usually triggered by a widespread drop in consumer spending. Traditionally, a recession is declared after two consecutive quarters of negative economic activity.
It means stock market and superannuation losses, and a general decline in quality of life – especially for retirees.
The reasons for the drop in spending are myriad, and over the past two years Australia has faced plenty of them.
An unprecedented and unforeseen global pandemic caused thousands of job losses, with associated lockdowns depressing spending even further.
Then, with supply chains already decimated due to the virus, the Russian invasion of Ukraine sparked an energy crisis that has resulted in electricity, gas and petrol prices soaring and left supermarkets struggling to get stock.
With inflation now running rampant, the RBA was forced to lift rates as a handbrake, but it has put enormous pressure on mortgage-holders and sent the stock market through the floor.
David Bassanese, chief economist of BetaShares, believes there is a good chance Australia could enter a recession within the next year.
“Consumer sentiment has already tumbled and house prices are starting to weaken,” he says.
“While I am still hopeful the Australian economy can avoid recession, it is at least a 40 per cent risk in the coming 12 months.”
With the stock market down, superannuation returns and retirement incomes are sure to follow. So, what can you do to protect yourself when stock markets are down and a recession is looming?
Leave your super and stocks alone
It may seem counterintuitive, but often the best thing you can do with your superannuation or stock portfolio during a recession is nothing.
It can be tempting to sell stocks or withdraw super when you can see things are heading south, but if you don’t plan on actually using the funds then you may just be solidifying the losses.
“If your stock fund is down 15 per cent and you withdraw 4 per cent, your account will be down 19 per cent,” says financial author John Waggoner. “Withdrawals in a bear market just make things worse.”
Withdraw more of your stocks or super
Contrary to the point above, if you know a recession is coming and you intend to withdraw a certain amount from your super each year, then withdrawing it ahead of time before stocks go down can lock in a better rate.
Financial planner Craig Tobermann says he recommends moving five years’ worth of income into liquid assets during a recession.
“Suppose you have a $1.25 million portfolio and aim to withdraw $50,000 a year in retirement,” he says. “In this case, you would want to keep $250,000 of it in liquid assets. This strategy lets you draw cash during a bear market without having to sell stocks at a loss.”
Rebalance your investment portfolio
Most super funds offer different investment options based on risk levels. If you have your funds invested in high- or even medium-risk assets, you could find yourself exposed during a recession.
Talk to your fund about moving your money into more controlled, lower risk investment classes.
It might not be a popular idea, but if you’re nearing retirement age but aren’t quite there yet, then staying employed may be your smartest financial decision.
Continuing to work and earn a living serves a dual purpose – you can keep putting money into your super, and you can give the stock markets time to recover from the recession losses.
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