Experts have been warning that we are way overdue for a recession. If you are anywhere near retirement age, you know full well that a recession is inevitable. A tumbling stock market will probably be the first metric because the markets try to anticipate what will happen about six months from now. Of course, that also means the value of any stocks you have will likely tumble six months before a recession actually takes hold.
What a Recession Means to SOME Retirement Accounts
What’s going on with the global economy? How about with trade wars and inverted bond yield curves? How will Coronavirus affect the markets at home and abroad? Does it mean a recession is imminent? When will it happen? Will it be mild, moderate, or severe? What does it mean for retirement accounts heavily invested in stocks and bonds?
If you start your day by reading any old newsletter, you might decide to go all-in when the market dips 300 points or get out if it dips more than 301 points. Similarly, a scary graph could encourage you to make exactly the opposite decisions. If that is your plan for managing your retirement account, you could soon be in for some tough financial times.
The real question is not if a recession is coming. The question is when is the recession going to hit? No economist can tell you when it will happen nor how bad it will be. But every economist will tell you there will be a recession.
Is This “the BIG One”?
We can’t tell you what will happen if you’re heavily invested in stocks when the market crash comes. But we can recommend that you have a solid plan for your retirement account long before the markets go under. It helps by thinking of your retirement somewhat in terms of a ‘Business Plan.’ Begin by thinking about how you should manage your cash flow, assets, expenses, taxes, and other business concerns. That is exactly how you manage a Solo 401k to protect your retirement money from uncertainty as a small business owner.
Having a plan for a recession or any significant changes in the economy keeps you from making quick and all-too-often misguided emotional decisions that may derail your retirement.
Do you want to be invested in the volatile stock market that you have no control over? Or do you want to be invested in the larger economy where you have direct control over the assets that you directly own?
The Stock Market is Not the Real Economy
Stock markets are where people (without crystal balls) place bets on what will happen with the economy in the future. More specifically, when you buy individual stocks, it’s a bet on what will happen with an individual company based on what that company and the economy will do in the future.
Stock markets (New York Stock Exchange, NASDAQ Stock Exchange, Tokyo Stock Exchange, etc.) are like grocery stores where you go to buy small portions of individual companies. The big difference is a grocery store has set prices that don’t change from one second to the next based on emotions and news headlines. Mutual funds are about the same as buying a variety pack of chips at the store. Mutual funds are still the same stocks that sell on the exchanges except they are pre-packaged together. And for the pre-packaging, you pay extra for management overhead.
The economy is about real meat and potatoes – literally. The economy is the real products and services that we produce and use every day. Each one of us is part of the economy every time we buy a tank of gasoline, or go to the bakery, or hire a tax professional.
There Are Many Types of Investments
On the other hand, a full 84% of all stocks are owned by the top 10% of the wealthiest people. It is their multi-million dollar trades that cause market volatility – not your $1,500 trade. Sometimes the wealthy feel positive about the financial future and sometimes they feel negative about it. But it’s always based on their values and wants. They never consider how much profit you earn from your rental house or if you will have a bumper crop of potatoes this year or if your cattle ranch is doing well.
So the stock market is not the economy.
You can always invest a Solo 401k in the stock markets but almost all Solo 401k owners choose to invest in the economy. You can even invest in real meat and potatoes like cattle ranches and potato farms.
Your Solo 401k Invests in the Economy That You Understand
A Solo 401k can invest in anything that you want to invest in. Before they retire, some investors prefer parts of the economy that offer real growth for decades (such as cryptocurrencies and other sustainable technologies like wind farms). As retirement draws near, many Solo 401k investors want more secure investments like rental houses that provide a monthly income. After all, everyone needs someplace to live. But the next shiny thing on the stock market often loses its glitter during a recession.
The business plan you want for your retirement account might not be fully recession-proof but you can certainly minimize the impact and have the direct control that enables you to power through it. Real estate and rental houses are favorite Solo 401k investments for many very good reasons. For one, almost everyone understands real estate. They understand that an address at 123 Maple Street isn’t likely to drop in value even when we are in the third month of a recession. Conversely, an acre of swampland out by the town dump isn’t going to go up in value no matter how hot the stock markets get. Solo 401k owners invest in things they trust and understand.
Be Prepared for a Potential Recession
During recessions, the first things to take a financial hit are nonessentials. These are also the last parts of the economy to recover when a recession is over. For the family budget, nonessentials are things purchased with the discretionary part of the budget (premium cable and technology gadgets for example). One reason rental houses are popular is that these are neither nonessential nor discretionary spending. But hotels are a class of real estate that is usually hard hit during a recession because even business travel is at least partially discretionary. With a Solo 401k, you can build in recession-proofing by holding tangible assets that are not sensitive to discretionary spending.
Look out for other recessionary sensitive investments. Retail stores are risky because consumers cut back on purchases. But discount retail typically does just fine. Consumer staples also weather a recession well (beverages, toilet paper, food, and other personal care items). Solo 401k accounts can own retail real estate if that is your preference.
On the other hand, when a recession becomes too severe, people even have to cut back on housing. People look for lower-cost housing. This downsizing causes demand for apartments. Apartment buildings (small and large) can be tangible assets in a Solo 401k.
Gold is also known for holding value during downturns. However, stock in a gold mining company has risk during a recession. For instance, the mining company could be denied a bank loan needed to continue production. Operations could cease or be curtailed. But a Solo 401k account can hold refined gold as a tangible asset.
During a recession and at any time, Solo 401k investors know they are at lower risk when they are invested in the meat and potato economy instead of flashing numbers on the stock market screens. Nabers Group understands that you want to minimize risk during a recession. When you have questions, we have answers. There are several ways you can open your Solo 401k. We work with you to meet your financial strategy and needs.
Have questions about growing your retirement account? The 401k experts at Nabers Group will help you get your retirement funds into your control, where they belong.