Investment Strategies During a Recession: How to Answer Your Clients' Questions

July 14, 2022

As a Wealth Management Advisor, you understand that a recession includes economic hardship, but it also presents opportunities—both while it’s happening and when it’s over. Your clients, on the other hand, may find it difficult to stay positive during tough times, especially when they might not fully understand the impacts of a recession.

You can help clients prepare portfolios for a recession without abandoning their financial goals. This means equipping them with strategies to survive the recession and thrive when it’s over. Here’s how you can approach the recession talk with your clients. 

Define a Recession

To explain a recession in layman’s terms, it’s important to be familiar with the official definition. The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy and that lasts more than a few months.”

You can simplify this for clients by explaining that a recession is marked by a general decline in economic activity. Several factors can contribute to a recession, including a financial crisis, sudden economic shock, widespread natural disaster or human-caused hazards, such as a pandemic. 

Explain the Duration of a Recession

It’s understandable for clients to want to know when a recession will be over, but unfortunately, there’s no set amount of time—it can span anywhere from a few months to a few years. In order for a period of time to officially be deemed a recession, there must be two consecutive quarters of negative GDP growth. NBER also tracks the average length of recessions. According to its data, the U.S. economy has survived 13 recessions since World War II, and the country’s post-war recessions have lasted 10 months, on average.   

Discuss Investing In a Recession

A recession is not a reason to change your clients’ overall investment strategies unless they have experienced a change outside of market factors (such as a job or retirement timeline change). However, a recession does create opportunities, including new investment opportunities. Let clients know that together you can alter their financial planning to take into account their current situation.

This is also an ideal time to review common investment myths with clients to help them gain a broader perspective. Additionally, you can offer these recession investment guidelines: 

Don’t Sell Off All Your Stocks

The stock market can be volatile during a recession, but historically it has always rebounded. While it’s tempting to get rid of underperforming stocks, selling them at a lower price doesn’t do any good, especially with high-quality stocks. It’s best to hold onto them and ride out the storm—better days lie ahead. 

Invest In Consumer Staples or Utilities

If a client is looking to buy more stocks (or shift ownership to “safer” stocks), point them toward consumer staples and utilities, as people will always need essential items like food, water and gas, even during a recession. 

Consider Dividend Stocks

Historically speaking, dividend stocks have provided a solid source of income during recessions. If your clients do buy dividend stocks, however, they need to keep an eye on dividend cuts, which can reduce the income that the dividends produce. 

Be Aware of What’s Going On

More than anything, it’s imperative that you teach your clients to always pay attention to market trends and keep an eye on both what they currently own and what they’re interested in buying. Discuss the importance of being cautious while actively monitoring the market and capitalizing on chances to acquire high-quality assets at lower-than-normal prices. 

Give Context to a Recession

While it’s important to explain to your clients the potential hardships of a recession, it’s also critical to help them understand that it’s actually a necessary part of the economic cycle. It helps to create a balance of economic expansion and contraction, and the economy has always bounced back once a recession is over. 

Weather the Storm with Farm Bureau

Farm Bureau provides its Wealth Management Advisors with the support and resources they need to administer the highest level of assistance to their clients. Learn more about how Farm Bureau can support your wealth management career.