We will learn a lot from this pandemic. But perhaps its greatest lesson—one that history teaches us over and over again—is that we can neither predict the future nor control it.
At best, the only thing we can do is to anticipate adverse events and plan for them accordingly.
Now that the "coronavirus recession" is here, everyone is trying to predict what the economy will do in the next few months, later this year, and in 2021. They speculate about "V," "U," "L", "W." and "J"-shaped economic recoveries (which basically denote short, moderate, long-term, or erratic recessions.)
Like most people, I have my opinions. And since this is my blog, I can share them :-). So, here are a few along with some ideas of what you might do if you find yourself in a tenuous financial situation.
I am neither an economist nor an epidemiologist (and I didn't sleep in a Holiday Inn Express last night). But from where I sit (in the cheap seats where the only things I can see are in the news or articles on the web), it looks like the pandemic is beginning to crest in the U.S. There is evidence of "curve flattening," but new cases are continuing to grow as testing reaches full capacity.
It's also possible that new virus hot spots will pop up in unexpected places, such as those with little or no infections now. And after it dissipates this summer, it may return with a vengeance in the fall.
In short, things are looking less bad from a health perspective, but that doesn't mean they will keep getting better and better. There will be some setbacks.
From an economic standpoint, the economy will have a second quarter of negative growth. (Remember, it had been growing at a rate of 2% to 3% plus over the last few years.)
Corporate earnings will continue to decline as consumers are reluctant to resume spending (perhaps more than anticipated). The third and fourth quarters may be a little better, but it all depends on what happens during the flu season later this year.
Some shut-down orders are set to expire at the end of April, and it remains to be seen what many governors will do. Some will relax restrictions, but many companies and small businesses will be slow to open, and even if they do, they may not immediately ramp up to pre-pandemic staffing levels. Consequently, the unemployment rate may remain stubbornly high.
Despite "curve flattening," some degree of social distancing will be part of the "new normal." (I know—I hate that phrase too! How can something be a "new" normal? Doesn't it take a while for something to become a "norm?" If the future will be different, and even a little strange, it won't be an old or new "normal." Perhaps it should be called the "new abnormal." But I digress…)
We may be dealing with the "new abnormal" until the virus is virtually eradicated through vaccines and herd immunity. Consequently, leisure, entertainment, and travel business will stay under pressure for some time.
From my cheap seat, this all looks like a 12-plus month "W" or "J"-type recession. How bad it will be is anyone's guess.
The economic fallout from the pandemic has undone a lot of the economic progress we have made over the last decade—as a country and also as individual households.
But the aggressive actions taken by the federal government have brought an infusion of a staggering amount of capital and liquidity into the financial system. This helped lift the financial markets (although they remain very volatile) and caused some to be more optimistic about our economic prospects.
At some point, we will all have to face the consequences of fiscal austerity. What will happen to unemployment? How many people will have to work for reduced wages? How many businesses will cease to exist?
And how will individuals and families respond?
After the 2008-2009 recession, as the economy improved, the public increased saving and aggressively paid down debt. Will that happen again? What effect will a sustained higher savings rate and less borrowing have on household or corporate spending?
What about social distancing? How soon will people start spending anywhere near the level they were? When will they readily return to crowded spaces like bars, restaurants, cruise ships, airplanes, public transportation, school classrooms, and the like?
Some churches will be quick to reopen, but will all members immediately return? What will the older and more vulnerable ones do?
Some people will argue that unprecedented monetary policy easing, government guarantees of private sector debt, and fiscal stimulus make for a brighter future and offset the negatives described above. Others are not so confident. I don't think there's any way to know for sure.
Given these challenges and uncertainty, what can we do?
Regardless of how this plays out (only God knows for sure), there are a few things that you should probably do now to weather the storm. Beyond that, you can only trust God.
1. Assess your employment situation.
For those not retired, this means understanding your employment situation and current income stream. Have you been laid off or furloughed? If so, when do you expect to be able to return to work? And what if your company's plans change and they delay re-opening and hiring weeks or months beyond what they initially intended?
As I stated above, many industries, businesses, and jobs are going to be impacted for the foreseeable future, perhaps longer. The economy is likely to be running "half full" for many months to come.
Therefore, everyone whose employment status has been affected needs to do an honest (and perhaps painful) assessment of where their job stands.
Make sure you understand and, if you choose, take advantage of your state's unemployment benefits and the additional federal supplemental payments. But these income streams may not last indefinitely. If you don't need your federal stimulus payment, stick it in savings. Better yet, help out someone who is in worse shape than you are.
You may not be able to know for certain when (and if) you will return to work. So better to plan for a worst-case scenario. If you were considering picking up some new skills or making a career change, this may be a good time to start the process.
2. If you're retired, assess your income situation.
Most retirees are living on some combination of Social Security and withdrawals from a risk-based investment portfolio. Some will also have a pension or annuity income, and perhaps income from part-time work.
Because retirees (especially recent ones like me) can be negatively impacted by sequence of returns risk, it's vital to assess your retirement income stream.
Most retirees don't (and probably shouldn't) have 80% or 90% of their investments in the stock market. The "average" 40% stocks/60% bonds retirement portfolio is down about 5.5% (based on the Vanguard LifeStrategy Growth Fund—VSCGX—which I used as a proxy). That's not a back-breaker, but the worse may not be over. (Those with a higher percentage of stocks have lost two or three times that percentage.)
If you're a "total return" investor and sell assets to generate retirement income, you may want to reduce, or if you can, suspend your withdrawals. That would slow down or stop the liquidation of depreciated assets. If possible, tap cash reserves or cash-like investments instead. Withdrawing from non-retirement savings accounts would be preferable over retirement accounts.
The "income investor" who is only spending dividends and interest needs to be on guard as well. Many companies may cut dividends or eliminate them for a time. Income from your portfolio could be cut in half or more.
Similar to the "total return" investor, the income investor may need to withdraw from cash reserves (preferably outside their retirement accounts) to bridge their income gap.
3. Assess your expenses
You may have been having problems with expenses before the pandemic. Spending is critical, even when times are good. If you spend too much, you won't have anything left over to give and save. If you don't save, you won't have any of the "cash reserves" I alluded to in #2 above.
If you were on a tight budget before the pandemic, and you are uncertain about your future income (as many are), start by looking closely at every fixed cost in your budget. That may mean going through every bill you pay regularly (rent, mortgage, credit cards, loan payments, car insurance, etc.) to see where you can get some relief. Some creditors may be more lenient during this unique time.
Next, look at all your variable expenses (food, utilities, entertainment, etc.). You may already be spending less on some of these, but there may be some ways to save even more.
4. Assess your investing.
The conventional wisdom is to continue to invest regularly, even when the markets are incredibly volatile.
If you keep investing, you will have the opportunity to buy assets when they are "on sale." The worst thing to do, especially when you're young, is to bail out of the market when things get tough. Deciding when to get back is harder than deciding to get out.
But if you are strapped for cash and can't pay your bills, consider suspending your investing for a time. Talking care of your family is more important than "staying in the market."
Growing your assets requires that you invest some percentage in stocks. Stocks are more likely to keep up with or exceed inflation than any other investment. If you want long-term growth, you need to be at least 20 to 80 percent in stocks, depending on your stage of life and risk tolerance. Now is probably not the time to sell out of stocks altogether; doing so will lock-in your losses.
Diversify your investments. That means invest in large companies, small companies, international companies, growth companies, dividend-paying companies and bonds, and for some, perhaps real estate. "Divide your portion among seven, or even eight, for you do not know what disaster may befall the land" (Ecc. 11:2).
If you are an average investor, as most of us are, consider using mutual funds or exchange-traded funds (ETFs) as opposed to picking individual stocks or bonds. Most of us don't have the expertise to pick stocks. And it is usually unwise to do so based on the latest "hot tip" or "sure to skyrocket after the pandemic" stock being promoted by a market pundit or earnest financial advisor.
If you haven't already, consider reducing the portion of your total assets represented by more volatile (risky) investments as you age (and are getting closer to retirement). You may want to wait until stocks have regained some of their losses.
5. Asses your cash position.
Dave Ramsey likes to use the phrase "cash is king." He isn't saying that having money is the most important thing in our life. He is referring to his preference for paying cash rather than debt, and also the importance of having an emergency fund.
Cash is king, especially during a financial crisis.
If you're working, having some cash on hand helps you to absorb the normal day-to-day things that would otherwise cause you to break out the credit card. If you have a large enough emergency fund (3 to 6 mos. is what Dave and others recommend), you could even weather a period of unemployment.
The current crisis shows just how important this is. If you have a 6-month emergency fund and end up being out of work for 8 to 10 months, you will probably be okay given the availability of up to 4 months of state and federal unemployment benefits.
For those close to or in retirement, it's equally essential (refer back to #2 above).
No matter what is happening with your investments, cash is one that can be used when drawing down other investments is difficult or undesirable. We should have learned that lesson in 2009, and we are being again reminded in 2020.
6. Assess your giving.
The temptation when times are tough is to hunker down, protect what we have, and figure out what we are going to do going forward. There is wisdom in some of this—we all need to pay attention to our financial affairs.
But doing so with no thought for others is unloving and foolish. Sure, we need to take care of ourselves and our family. But as Christians, we must also be mindful of the needs of others.
Philippians 2:4 says that we should not "…look not only to (our) own interests, but also to the interests of others."
We can do that by not neglecting to share what we have with others. Even when things are tough, "such sacrifices are pleasing to God" (Heb. 13:16).
So, even as you make the difficult decisions about your finances in light of the current situation, remember that there are probably those who are in much worse shape than you are. Ask yourself, "what would God have me to do?"
As you put your faith and trust in him, and follow his leading, he will, "… make all grace abound to you, so that having all sufficiency in all things at all times, you may abound in every good work" (2 Cor. 9:8).
The bottom line
If the fallout from the pandemic—the brutal combination of a health crisis with financial destruction—has shown you that you ill-prepared for both expected and unexpected life events, work through the above list and prayerfully consider what you need to stop or start doing.
To accomplish this may require that you make lifestyle changes—the biggie being to make sure you are living within your means so that you can give and save for both short term emergencies and long term needs you know you will have in the future.
And above all, make sure your ultimate faith and trust in God who, "our refuge and strength, a very present help in trouble" (Psalm 46:1).