What to do when the markets are in a free-fall
Over the past few months, there have been several threats to the health of the U.S. economy, and signs indicate a recession is on the horizon. Investors are worried about their portfolios and how to protect their capital if the worst happens. I’m going to recap what’s going on, the possibility of a recession, and a few things you can do as you navigate these uncertain times. Keep in mind that I’m not a financial advisor, attorney, or tax consultant, so please talk to these professionals before you make any investment decisions. Now let’s jump in.
Inflation + Uncertainty = Volatility
Throughout 2022, investors have experienced volatile markets caused by ongoing supply chain disruptions, chip shortages driving electronic prices higher, and the impacts of the war in Ukraine on energy and food prices. As of this writing, current inflation rates remain high despite a slight slowdown from the 41-year high previously at 8.5% and now sits at 8.3% as of the end of April. People across the country feel the pain of the increased prices across all sectors, and companies like Walmart and Target are struggling with higher costs, leading to lower earnings.
To combat inflation, the Federal Reserve raised the benchmark interest rate by half a percentage point, with more rate increases to come. The rise in rates should create a domino effect and slow the demand for goods. However, if the Fed raises rates too fast, investors worry it could slow growth to recession. Overall, the Fed’s actions are limited and don’t directly affect the shortage of wheat and natural gas supplies. Raising rates won’t create an inventory of homes to meet buyer demand.
The impact of market decline has had a widespread effect. Retirement savings, 401(k) accounts, and investments made for college tuition have taken a hit. The volatility and uncertainty have caused retirees to wonder if they will have to return to work sometime soon.
On the flip side, increasing interest rates reward savings in cash, so investing in long-term investments like technology stocks becomes less attractive, causing markets to decline even more.
In May, the S&P 500 temporarily hit bear market territory before recovering. By the time you read this article, the market will probably have gone through more swings. This volatility causes investors to feel there is no safe place for their capital. So, what can you do?
Examine Your Portfolio
While a recession is a natural part of the economic cycle, managing your portfolio during a recession can be a stressful endeavor. Only history knows how long bear markets and recessions last, but there is no way to know when they will start.
If you have a properly diversified portfolio and some well-thought-out long-term investments, the ideal path is to ride out the storm. What were your original goals, and how achievable are they now? Pivot if you need to but talk to your financial advisor and try to get unbiased advice. The last thing you want to do is make a rash decision based on fear.
You’ve probably heard of diversification, i.e., having your investments spread out across assets like stocks, bonds, and real estate. Assuming you’ve followed that advice, it’s probably time to examine your capital allocation to real estate. Investing in real estate is a wise long-term investment and has proven itself over the years.
People will always need housing, and locations for businesses will continuously be in demand. Over the last two recessions, investors have found success in investing in self-storage, but don’t just take my word for it.
Self-Storage and Recessions
During times of uncertainty, lives can change dramatically: divorce, downsizing, and unemployment are all things that can happen during a recession. If you want to add firepower to your portfolio, consider self-storage. Here’s what financial website The Motley Fool had to say about self-storage:
“Self-storage is arguably the best real estate industry to be invested in during a recession. Self-storage at its core is in the business of distress.”
According to The Motley Fool, self-storage has been the best performing sector of ALL REIT (real estate investment trusts) industries for the past 27 years.
During the recession of 2008-2009, ALL listed storage REITs saw strong positive performance during that time of dramatic change in people’s lives. Let that sink in.
Why did storage perform so well? It’s simple: the many life changes during a recession drive people to put their stuff in storage and often stay longer than they first anticipated. For instance, when renters move into a smaller space and family members move back home, they need a place to store their belongings. Plus, many businesses that (unfortunately) are on the brink of failing and/or have employees now working from home need a place to store their belongings until their situation changes.
Conclusion
The Fed will do what it can to tamp down inflation, remove uncertainty, and calm market volatility, but it can only do so much. Having a level head and being prepared for worst-case scenarios can help you successfully ride out a potential recession. Reevaluate your portfolio and make sure your capital allocation is diversified as best it can be. Consider the resilience of self-storage as proven over time with data. Add it or increase your allocation if it makes sense to do so. There are no easy decisions when facing uncertainty, but know you’re not alone and you will make it through.
