A recent financial advice column for the Financial Times says don’t worry, there won’t be a recession by 2019—something about banks being sound. But as Financial Times economics editor Chris Giles writes, it turns out financial advisers are usually more cheerful than economists and both are confused. So who should we believe?
This month the International Monetary Fund forecasted slow growth, a gloomier prediction than last year’s, with an opaque sentence that says it all: “Risks to global growth tilt to the downside.” Looks to me like the IMF, blaming tariff uncertainties and slow growth in Asia and Europe, thinks there will be a worldwide slowdown by 2020. But the IMF didn’t use the word “recession."
Berkeley professor Brad DeLong is a good economist and aggregator of economic data, and he won’t be pinned down with a prediction. But he points out chillingly that the U.S. government shutdown—if it weren’t bad enough—made key data necessary for predicting recessions late and spotty. The data we do have aren't promising. China is key here and though they won’t admit to a slowdown, Chinese auto sales are down 6% year-over-year. Auto sales kind of predict everything. US auto sales? Basically flat.
For the record I believe we will have a significant slowdown in 2019 for reasons I’ve talked about before.
These conflicting opinions really mean nothing to ordinary people trying to plan their lives. With my economist hat on I say to investors that I don’t know when a recession might hit, but that you want to be in the position that you really don’t care when it happens.
The smart money investors don’t time the market. The reason I say the obvious is because it’s really hard to do nothing. So do something, just don’t time the market.
- Do figure out about when you need your money and how much risk you can take. Do invest in stock index funds the further you are from needing the money. Follow really smart stock pickers like Jack Bogle, the recently deceased founder of Vanguard, who helped popularize the index fund. It takes a good stock picker to know that picking stock is a fool’s game and that the vast majority of people should use index funds—this clever insight comes from Chris Carosa.
- Do discipline your portfolio. Pick how to allocate risky and less risky assets as you age. Stay the course. Do rebalance when the prices of stocks and bonds change, though I advise a disciplined rebalance done once a year. I pick February to rebalance, though I watch the market hour by hour. If you are about 45 with a portfolio of 60% stocks and 40% bonds and the stock market crashes, buy more stocks when you rebalance. You may have your fingers on the keys at the moment of the crash, but take them off and keep your discipline.
- Do use non-conflicted advisers. Vanguard provides non-conflicted advice (although they advise you to invest in Vanguard funds) and charge about the lowest fees you can get. This is because they are a mutual company—the profits go to the account holders who are the shareholders. If you need to talk to someone about your finances because you have more than a house and a retirement account, then pay a fee. Never use an adviser who doesn’t charge you anything. Free advisers cost a lot.
- Do fall in love with your stuff. Since a recession is probably coming, don’t buy or do anything with the expectation that your pay will rise or that it will be easy to find a job that pays a lot more. Don’t expect your house value to go up, and don’t expect that if you take on leverage to buy a house that it will pay itself back in appreciation. Don’t borrow to buy a consumer durable. Love your unremodeled kitchen, your vintage appliances, and your ten-year-old car.
I am not sure when a recession is coming. All economists are humbled by our track record. The Economist magazine reminded us in mid-December that economists do much better at predicting GDP growth only a few months ahead, and are much better at predicting expansions than recessions.
Financial advisers are a bit worse—they seem to think sunshine is just around the corner. I get that no one wants to jinx a good thing. I don’t want to be gloom and doom, but prepare for a recession by preparing not to react. Hunker down.