An economic recession causes ripple effects in the economy. While everyone is feeling the effects, most can only wait for sunnier economic times to arrive.
Knowing how long a recession can last can help you weather the storm. A financial advisor can guide you in making smart investment moves for your portfolio during a recession.
What is a recession?
A recession is a severe economic downturn that lasts more than a few months. Generally, an economic downturn is not considered a recession until the economy has experienced negative growth for at least two quarters. Economic growth is measured by gross domestic product (GDP).
You may see the unemployment rate rise or stock prices fall during a recession. Investors have less funds to invest and often lack the necessary confidence to invest in the market.
Wells Fargo: The US is entering a recession
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One important indicator that acts as a warning sign of a recession involves an inverted yield curve. In this case, the yield on long-term government bonds is lower than the yield on short-term government bonds. This inversion shows a lack of faith in economic timing. Since 1970, an inverted yield curve has occurred before every US recession.
A few other indicators include business closings and a shrinking stock market.
How long do recessions last?
According to the National Bureau of Economic Research (NBER), the average duration of recessions since World War II has been approximately 11 months.
But the exact duration of the recession is difficult to predict. In general, a recession lasts from six to 18 months.
For example, the Great Recession that began in December 2007 lasted 18 months. But the 2020 pandemic-induced recession lasted only two months. When a recession is on the horizon, it’s impossible to know how long it will last.
When does a recession turn into a depression?
The length of a recession varies. But where is the line between recession and depression?
In general, a depression is an economic downturn that lasts longer than expected or has extremely severe consequences. But there is no technical definition that distinguishes depression from recession.
For example, the Great Depression and the Great Recession made names for themselves. But the negative impacts of the Great Depression were far greater than the impacts of the Great Recession. That’s because the Great Depression lasted 10 years! That’s significantly longer than any recession on the books.
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How to prepare for a recession?
In a prolonged recession, almost every household is feeling the pinch from a tighter budget. Financial security can be lost as a result of spikes in unemployment and a sharp decline in retirement savings. But the reality is that recessions are part of the business cycle. Rather than hoping it never comes, it’s better to prepare for a recession. Here are four common strategies for preparing for a recession:
Have an emergency fund
Rising unemployment is a hallmark of most recessions. If possible, build an emergency fund to cushion the financial fallout in the event of a layoff. Most experts recommend spending savings between three and twelve months. But the exact amount varies depending on your risk tolerance and income stability.
Consider your risk tolerance
The right investment portfolio carefully considers your risk tolerance. Because large losses are likely during a recession, you must be able to stay the course.
Invest in alternative assets
If you don’t want to keep all your eggs in the stock market, look at other options. Real estate and precious metals are a few potential investment options to consider.
If you have a portfolio of assets, don’t panic. While it’s tempting to sell off your assets at the start of a recession, it’s often better to stay the course. Jumping in and out of the market in an attempt to bottom out often leads to lower returns in the long run.
But staying financially comfortable during turbulent times can be challenging. A financial advisor can help you navigate the changing economy while keeping your long-term goals in mind.
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*The material is analytical in nature and is not advice to buy or sell assets in the financial markets