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Tag: Recession

Batten Down the Hatches: Fine Tune Your Small Business Plan for Any Economic Environment

In recognition of the more than 33 million small businesses in the U.S., we are sharing helpful best practices to fine-tune your small business plan to weather economic shifts. 

Responsibly manage your business debt

Interest rate changes have significant impacts on business lending. To effectively manage your debt, consider these financial tactics before applying for a business loan: 

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Convert floating debt

Consider converting any floating-rate debt to fixed-rate debt, which flips the mindset from short-term financing to a longer-term solution that may be more suitable for your small business paln. Although many borrowers use their investment portfolio as a natural hedge for floating-rate debt, it may still make sense to lock in a low, fixed-rate now for any variable-rate debt you may have.

Consolidate debt

If your company has extensive overhead costs with bills and outstanding balances, debt consolidation could be a smart strategy to move existing debt into one streamlined payment. Debt consolidation can potentially provide a longer repayment period and/or lower interest rate — both of which can help improve available liquidity. 

Clean up your credit and tax liens

A tax lien is the government’s legal claim against your property when you fail to pay a tax debt. Make sure your credit and tax debt are up to date and tidy to ensure you’re getting the best rates available. 

Transition from alternative lending sources to conventional

If your business has alternative financing on the balance sheet, but you’ve been able to stabilize your profits and expenses, now may be the right time to convert your debt to more traditional loans and lending. 

READ: How Colorado Businesses Can Benefit from Nontraditional Funding and Private Equity Firms

Be honest with your banker

This may seem obvious, but you’d be surprised how many business owners inaccurately fill out loan applications whether intentionally or inadvertently. Filing for bankruptcy or having a tax lien is not an automatic disqualifier in the application process. With that in mind, it’s better for your relationship with your banker to be transparent about details. 

Strategies to improve income

If cash flow is top of mind, take inventory of your equipment and see if there is anything old or outdated that can be sold, refinanced or salvaged. Also, spend time reviewing your assets to determine how they can help the business work smarter and improve liquidity with your small business plan in mind.

If your business is inventory-based, assess your supply regularly and consider buying in bulk or shopping around to get the best purchase price. Another option is to restructure your pricing to align with the current market, inflation and competitors. However, be wary of aggressive price increases to avoid upsetting your current customer base. 

Another way to improve cash flow is to streamline your accounts payable and accounts receivable processes. Review timing, steps and ways to reduce your business bank account churn. 

Combat supply chain challenges

Small and large businesses alike are being impacted by supply chain disruptions like slow manufacturing and delayed shipping. As a result, we continue to see increases in shipping costs, storage expenses, delivery delays and logistics issues.

To combat the supply chain challenges, consider ordering material further in advance than typical so you can more confidently predict what you need. This can impact upfront costs, but can also help assuage concerns about products, parts and shipping timing. 

Implement employee-retention strategies

With unemployment in the U.S. at 3.5%, it’s important as a business owner to develop employee-retention strategies to not only keep your employees but ensure they are happy in their roles. With nearly historical lows and despite some recent softening, the labor market remains competitive.

READ: Navigating the New Era of Employee Engagement — Everything You Need to Know

Here are some financial considerations in today’s labor market: 

  • Invest in and strengthen your current team through talent development, wage reviews, internal promotions and hires to help retain your current workforce. 
  • Recognize that hiring costs have increased and plan accordingly. If raises and promotions are not in your small business plan, focus on benefits to make up any difference in salary or hourly pay.
  • Embrace the hybrid home-office schedule and provide flexible work environments. Consider how the work-from-home shift can help you cut costs if your industry allows for virtual or asynchronous work.
  • Be shrewd in your resourcing forecasts knowing you may not have the upper hand in resignations and new hire negotiations.

Maintaining an effective small business plan requires an immense amount of discipline and perseverance, even in the best economic conditions. In today’s volatile environment, this is more important than ever. As a business owner, you must be willing to adapt to any changes that come your way and pivot to ensure your business is successful. Strategize and plan well by having a strong relationship with your banking partner, managing your debt, improving cash flow, finding alternative financing options and focusing on employee retention.

 

Jake Hymes HeadshotJake Hymes is the senior vice president, director of small business at UMB Bank.

Securing Your Financial Future: Key Considerations and Questions for a Solid Plan

Whether you are thinking about job security, your retirement or your financial portfolio, uncertainty abounds. However, I would argue there is no better time than right now to think about your financial future.

Simply counting on investment performance is not a complete financial plan. Financial planning looks different for everyone — and it should. Everyone has individual priorities, philosophies and values. All of this should be reflected in a unique financial plan that fits your lifestyle as well as your short- and long-term goals.

As you look at putting a financial plan in place or updating your current plan, here are some topics to consider and questions to ask.

READ: 4 Key Asset Allocation Strategies for 2023

Look inward to identify your top concerns and emotions

Experiencing difficult life moments can knock us off balance. Before making any big changes or decisions, identify the emotions and concerns you have, and any you may be harboring for your future.

During unsettled economic times, we tend to react quickly — maybe out of fear, or simply because it seems ineffective to do nothing. When it comes to long-term financial plans, doing nothing can be considered an action. While quickly changing your investments, savings or spending because of uncertainty may help your day-to-day finances, it could impact the long view significantly. That’s why we recommend taking stock of how you’re feeling before you start digging into your financial choices.

Start with a financial review

A solid financial review with an advisor will help you recalibrate where you are today and where you want to go by looking at your current spending and saving habits to help establish your plan’s baseline.

You will review your current assets, debts and income to determine the variables that can influence your plan’s success. Once you have created a foundational financial plan, you will start to discuss your concerns, passions, plans and issues to help shape and define your financial journey.

Put family first

Thinking about your family, or the family you’d like to have in the future, is an important part of your financial plan. Whether you are planning to have children or thinking about how you will pay for their education, there are many ways to start preparing today. This can include starting a health savings account (HSA) for future medical expenses, looking into financial options for adoption, flexible savings account (FSA) considerations for childcare, and starting a 529 or other higher-education savings plan.

Career and lifestyle decisions

What does your career trajectory look like? Do you plan to retire at your current company, or have you always wanted to explore a different career that involves your passions? Consider how are you planning for these wants now so you can enjoy them in the future.

Conversations about your wants and expectations regarding your career, travel and lifestyle should be factored into your financial plan. Philanthropy should also be a part of this conversation. Do you want to contribute your time and money to nonprofits that matter to you? Have you thought about how to do this on a weekly, monthly or annual basis? This conversation will also lead into your estate planning and the legacy you want to leave after you are gone.

READ: Maximize Your Charitable Giving Donations — Aligning With Your Budget and Passions

Retirement considerations

No matter the age you want to retire, it’s important to know what you need to get there. Planning for your retirement should be an active exercise, not a passive conversation, which looks at your 401(k) and other investment accounts every year. 

Discuss what your pre-retirement and post-retirement plans look like for you and your family. By thinking and talking about your long-term dreams, you can start planning and budgeting today.

The first step in your financial plan

I know it may be hard to think about long-term plans during times of uncertainty. But I encourage you to think about your financial future and what that looks like in the years to come.

Consider partnering with a financial advisor to help you reach your short- and long-term objectives. When you have a financial advisor who is focused on your unique journey, he or she can help you discover your areas of strength and identify improvements to maximize success. A financial advisor will help optimize your lifestyle, establish your legacy and build your wealth for today and the long term.

 

Newton NikkiNikki Newton is the president of UMB Private Wealth Management and can be reached at [email protected].

The Pros and Cons of Investing in Real Estate During a Recession

Regardless of your finances, investing in real estate during a recession might be a hard concept to wrap your head around, and understandably so. Although a potential 2023 recession won’t be like the Great Recession of 2008, which was directly related to the housing market, people and businesses alike are tightening belts in anticipation of financial hardship on an unknown scale.

READ: What Does a Recession Mean for Your Finances? 

A recession is broadly defined as an economic contraction or two consecutive quarters of GDP decline. A potential 2023 recession would impact various individuals and industries, especially the real estate industry.

Home prices rose in 2021 and stayed high in 2022 as more people sought new homes further away from city centers. Now, rising interest rates and daily layoffs will have some bearing on real estate in the coming months.

This doesn’t mean all hope is lost if you want to invest in real estate this year. Real estate buyers in good financial standing will still have options to invest in property. Here are some of the pros and cons of investing in real estate during uncertain economic times.

Pros of Investing in Real Estate During a Recession

1. Lower purchase prices for home buyers

Even the rumors of an economic downturn can be enough to drive down the demand for residential real estate. This decline in demand will likely lead to a decline in real estate prices, which spiked in 2022.

Home prices are not as threatened as they were in 2008, but interested and prepared buyers can take advantage of a likely dip in listing prices in hot real estate markets like Colorado’s.

2. Diversified assets

The stock market is one of the most visible ways a recession manifests for consumers. People who have money invested in the market may benefit from investing in real estate and other alternative assets while stock prices are on the decline.

3. Reduced competition

Despite the pros, investing in real estate isn’t part of most people’s recession finance strategies. Recessions often lead consumers to reduce their discretionary spending and instead shore up cash and emergency funds. 

The result could be the opposite of the buying frenzy many markets have seen since the start of the pandemic. With less competition for real estate, you won’t have to take as many risks to win any potential bidding wars.

Cons of Investing in Real Estate During a Recession

Higher interest rates

Many recession fears began when the Federal Reserve quickly drove up interest rates in 2022 to ease the effects of inflation. These high interest rates are still in place, making it more expensive for potential buyers to borrow money. Lenders are also likely to be more selective when evaluating candidates for a mortgage, prioritizing higher credit scores and increased down payment requirements.

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Increased personal financial risk

Recessions are unpredictable, but they often trigger an increase in unemployment as businesses let go of employees to cut costs. Before making a real estate purchase, make sure you have enough cash flow and stable income sources. If you were to lose your job or face any other short-term financial hardships, it could jeopardize your ability to pay for essentials. 

Real estate is still a costly purchase when you consider the associated closing costs and broker fees. Find ways to reduce some of these costs, such as working with a discount real estate agent or negotiating the total price.

Fewer people selling homes

If you’re planning to sell a property you already own in favor of a new one, a decline in listing prices could mean lower profits from the sale. Smaller profits will make it harder to buy a new, high-value investment property. 

Best types of real estate to invest in

If you have cash flow and income stability, a recession shouldn’t stop you from investing in Colorado real estate. Aside from a single-family home purchase, here are some alternative types of investments to consider.

READ: What Is the Difference Between Class A, B, C, and D Properties?

Rental Properties

A recession may slow down first-time home purchases, but people will still need housing. Purchasing a rental property provides another source of income for your household, whether it’s a short-term lease or a consistent vacation rental. Colorado in particular has become a desirable destination for remote workers who value the flexibility of short-term and vacation rentals, and an economic downturn might mean rental property owners are ready to sell.

As with any property investment, owning a rental property also means taking on landlord responsibilities and maintenance costs. Be sure to factor those in as you evaluate whether a rental property purchase is right for you.

Properties you can “flip”

For those with time, patience and the real estate knowledge to flip a house, banks and owners selling homes for cash provide an opportunity to turn a respectable profit on a real estate investment. But flipping a house isn’t as simple as reality television makes it seem. Ensure you have the cash on hand to make the purchase and cover any expenses incurred during the renovation.

If you’re not ready to take on the financial risk of a fixer-upper, try wholesaling to earn extra income from real estate during a recession. Wholesaling is a short-term strategy similar to flipping but that doesn’t require the wholesaler to purchase the property. Instead, wholesalers work as intermediaries to help eager sellers let go of their properties, accumulating capital in the process.

READ: How to Sell Your House in a Down Market — 6 Easy Tips

Real estate and REIT ETFs

Investors who want the financial benefits of real estate investing without the burdens of home or property ownership should consider real estate or REIT exchange-traded funds (ETFs). REIT ETFs add the diversity that real estate investment offers in a financial portfolio without the surprise costs of physically owning and managing a property. These ETFs are also often low-cost, an added benefit during a period of economic downturn.

Investing in real estate during a recession is still possible

A recession shouldn’t mean an end to your dreams of real estate ownership. Potential buyers with cash flow and strong credit can take advantage of the decrease in competition and listing prices. Real estate investment, like any investment, comes with risk. As a potential investor, it’s important to evaluate how much risk you are willing to tolerate in exchange for the addition to your portfolio.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. 

Exploring Opportunities in the Global Stock Market: Unlocking Profit Potential in 2023

There is an old adage on Wall Street: “Sell in May and go away.” In theory, on a calendar basis, the worst months to be invested in the stock market are from May to November.

Whether this is true or not is anybody’s guess, but last year it certainly was. Today, investors must decide how best to position their portfolios for the rest of 2023. Should you buy dividend-paying stocks, longer-duration bonds to lock in yields, or invest money overseas? Before you can answer any of these important questions, consider what the Federal Reserve might do with short-term interest rates for the rest of the year to combat inflation, and how the debt ceiling gets resolved. Both issues will impact the direction of the markets and, quite possibly, your investments.

READ: 4 Key Asset Allocation Strategies for 2023

Interest rates & inflation

Since the fall of 2021, the Federal Reserve has struggled with the issue of inflation. At first, they considered it transitory, but last spring inflation became the real deal. Consequently, the Fed had to aggressively raise interest rates nine times. Fortunately, inflation has begun to come down, from over 9% to 5%, but the Fed’s inflation target is 2%. This means the Fed still has some more work to do. There is a chance with the latest regional banking crisis in March, small businesses and individuals will find it harder to get loans from their local banks, which, in turn, could slow down the economy. However, the Fed is poised to raise interest rates at least one more time on May 3. After that, it will be data-dependent, with the unemployment and consumer price index numbers being scrutinized carefully to get a read on inflation.

Debt ceiling

Looming in the not-too-distant future, the debt ceiling issue could turn into a full-blown crisis if the Republicans in the House of Representatives and President Biden do not raise the debt ceiling before the government is no longer able to pay its bills.

Treasury Secretary Janet Yellen has warned Congress that time is running out — if the April tax receipts are not high enough, the due date could be as soon as early June instead of August. Republicans would like to extract spending cuts from the Democrats/President Biden in exchange for passing a debt ceiling resolution. At this point in time, neither side wants to compromise. If they do not find common ground, the country could face financial Armageddon by defaulting on its debt. The consequences would be catastrophic. We came close to a debt default in 2011. Because of that threat, America’s debt rating was downgraded by Standard & Poor’s from AAA to AA+ for the first time. A default could make borrowing costs increase, cause a massive sell-off in the stock market, or bring on a recession.

READ: What Does a Recession Mean for Your Finances?

Investment ideas

Despite higher interest rates, inflation, and the debt ceiling issue, the stock market is the greatest discounting mechanism ever created. By the time all the bad news comes to fruition, investors are already looking ahead and markets tend to climb a proverbial wall of worry and go higher. Knowing this, where are logical places to invest money for the rest of 2023?

Dividend-paying stocks

When markets are volatile and the headlines are scary, a great place to ride out the storm is with a diversified mix of blue-chip dividend-paying stocks. Invest in companies that can increase their dividends regardless of what economic cycle we are in. Today, stocks that provide meaningful and growing dividends are in the consumer non-durable, industrial, energy, and utility sectors. Another positive is that these stocks have been underperforming year-to-date versus the largest technology stocks and should be able to weather a recession because their products tend to be essential.

Bonds and money market funds

After the worst bond market in decades and much higher interest rates, now is a decent time to buy bonds or money market funds. In the bond market, you may want to consider a barbell approach. You do this with bond ladders, where you buy both short-term bonds and long-term bonds. If you do this, you could benefit if interest rates rise because you will have new money from your shorter-term maturities to reinvest annually. If interest rates drop, you will get appreciation on your longer-term bonds. If you want to have more liquidity and less interest rate risk, you can keep your money in a brokerage money market fund yielding almost 5%. 

International stock market

For the first time in a decade, the international stock market is outperforming U.S. stocks. This makes sense for a myriad of reasons.

First, the dollar has quite possibly peaked; when this happens, international companies make more money by selling their products to consumers in the United States. Second, China has recently reopened for business after three years of tight COVID-19 restrictions. Third, international stocks are inherently cheaper. Today they trade at significantly lower price earnings multiples. And finally, Americans typically have a home investment bias and may be under-allocated overseas. If international stocks continue to outperform, money could move out of the U.S. to international markets to find higher returns.

The bottom line

It has not been easy being an investor since the spring of 2020 and the pandemic, but despite all the volatility and negative headlines, we believe you have been better off staying invested through all the ups and downs. Moreover, for the first time since 2008, if you want to play it safe, you can own short-term bonds and brokerage money market funds. They all yield close to 5%. For longer-term investors, collecting dividends from great companies here and abroad is not a bad way to go either. 

Thumbnail Fred Taylor HeadshotFrederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

What is the Debt Ceiling Crisis?

There has been a lot of news lately about the debt ceiling, but what exactly does that mean? According to Wikipedia, “In the United States, the debt ceiling or debt limit is a legislative limit on the amount of national debt that can be incurred by the United States Treasury, thus limiting how much money the federal government may pay on the debt they already borrowed.”

If Congress does not approve raising the current debt ceiling in the United States, our government might default on its debt obligations. If this happens, the economic fall-out could be catastrophic and send the financial markets into a tailspin. Unfortunately, the annual debt ceiling vote in the House of Representatives has become a political game of brinkmanship with nerve-wracking drama on both sides of the aisle. Here’s what you need to know.

READ: Our Economy in 2023 — What to Expect

Timing

The last time the debt ceiling was raised was in December of 2021 to $31.381 trillion. This year, Congress needed to extend the debt ceiling again on January 23, 2023, also known as the “X” date. But that date came and went, and Congress did not approve a new debt ceiling. Secretary of the Treasury Janet Yellen had to use accounting tricks that she labeled as “extraordinary measures” for the U.S. government to keep paying the bills and avoid default on its debt obligations. These actions did buy some time, (most likely to early June), but if this deadline isn’t met, the rating agencies may be forced to downgrade the credit rating of the United States because of default.

The Problem

The national debt continues to rise year after year because of annual budget deficits. The first debt ceiling limit was set at $11.5 billion back in 1917, and the ceiling has been raised more than 100 times since then. Until we balance the annual budget, the debt ceiling limit must be increased every year. The last time we had a budget surplus was in 2001. Under President Clinton we had surpluses from 1998-2001. Since then, we haven’t had any. The Great Financial Crisis in 2008-2009 and the COVID-19 Pandemic in 2020 have only exacerbated these deficits with massive government spending.

The Issue

The Republican Party, led by Speaker of the House of Representatives, Kevin McCarthy, wants to use the debt ceiling issue to impose a spending cap in exchange for temporarily raising the debt ceiling. McCarthy wants Democrats to negotiate on federal government spending. President Biden has stated that he doesn’t want to be held hostage to any conditions.

The problem here is there aren’t any easy ways to reduce spending. The government can’t cut Social Security, Medicare, or fail to pay interest on the national debt. Defense spending might be an area where they could cut costs, but with the threat of China invading Taiwan and Putin’s invasion of Ukraine, that doesn’t seem likely or prudent.

READ: Biden is Right About One Thing — Oil and Natural Gas Aren’t Going Anywhere

Déjà Vu

The last time the debt ceiling was so prevalent in the news was back in 2011, which ultimately led to the Standard & Poor’s rating agency downgrading the debt of the U.S. from AAA to AA+. Before this, the United States had the highest AAA rating since 1941.

This was a huge deal. A spokesman for the agency said, “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge.” Today, the political landscape is just as nasty as it was back then, and with rising interest rates causing an inverted yield curve, the U.S. could be headed for a recession in the next 12 months.

Ramifications

Once these extraordinary measures run out and the debt ceiling is reached in early June, the government will no longer be able to issue debt and will have no cash to pay its bills.  Consequently, the federal government could no longer pay social security and salaries of government workers. Our government would effectively shut down. The Committee for a Responsible Federal Budget says “without enough money to pay its bills, any of the payments are at risk, including all government spending, mandatory payments, interest on our debt, and payments to U.S. bondholders. While a government shutdown would be disruptive, a government default could be disastrous.”

Market Reaction

The last time Congress and President Obama played a game of chicken with the debt ceiling and spending cuts, the stock market fell 16% in the five weeks between July and August of 2011. There is no reason to believe a severe and negative reaction wouldn’t be felt again. So far, neither the stock nor bond markets seem too concerned about the debt ceiling. Both have had a great start to 2023. Possibly by May, investors will start to pay attention to what Congress will do; until then, this issue doesn’t seem to be on the market’s radar yet.

Defaulting on our debt is financial Armageddon and not a viable option for Congress. Cooler heads must prevail as they did back in the summer of 2011. The fall-out for the stock, bond band U.S. dollar could be horrific for investors here and abroad. There is really no way to quantify the damage or years it would take to recover. This is one instance where the Federal Reserve likely can’t save the day. Powell doesn’t have the power to force members of Congress to pass any bills. Fortunately, over half the members of Congress are millionaires, so any financial damage from a default will be acutely felt by them as well.

 

Thumbnail Fred Taylor HeadshotFred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results.

Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

4 Key Asset Allocation Strategies for 2023

We all know how painful 2022 was for investors. To put it in perspective, conservative balanced portfolios with 60% in equities and 40% in fixed income were down almost 20%. The more aggressive, all-equity growth portfolios were down over 30%. Even 20-year treasury bonds lost 30% in 2022.

This carnage was caused primarily by the Federal Reserve raising interest rates seven times last year, though the war in Ukraine and China’s restrictive COVID policy did not help. After such a horrible year, what do you do with your money? How investors position themselves from a risk perspective is vitally important; one way to do this is through proper asset allocation strategies.

READ — 7 Crucial Investment Strategies for 2023

According to Investopedia, “asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.” Investors must ask themselves how they would feel about losses of 30% versus gains of 30%. Is it more comfortable psychologically not to lose that much money on paper in a bear market or miss out on major upside during a bull market? If the answer is “I would rather not lose 30%, ” then you may want to add more defense to your portfolios through diversification. Typically, this is done with bonds, cash, or alternative investments. Another aspect of picking the right asset allocation strategies is whether income is important. If it isn’t, then a total return approach is another way to invest. The third option would be a balance of the two.

Asset Allocation Strategies: Income Investing Approach

For some investors, buying stocks and bonds for income feels better than just investing for growth, in principle. At least your portfolio is generating positive cash flow. After a year like 2022, this makes perfect sense. However, from 2019 to the end of 2021, you would have missed out on a lot of upsides when growth stocks were up double-digits.

The good news for income investors today is bonds offer much higher yields than just a year ago. In fact, you can get almost 5% on a 6-month treasury bill. With the 20% correction in stocks last year, companies’ dividend yields are higher too. Alternative investments may even pay 6-8% in distributions. With the uncertainty surrounding inflation and the possible moves by the Federal Reserve, if you can get paid 3-5% in income from dividends, interest on bonds, or distributions from alternative investments, that might be a safer way to go after last year’s carnage and nowhere-to-hide mentality.

READ — 5 Ways Small Business Owners in Colorado Can Survive Inflation

Growth Approach

Another approach to investing is to buy investments strictly for growth. This was a very successful investment strategy for many years until last year. In the low-interest rate environment from 2008 to 2021, companies with no dividends and strong sales did extraordinarily well. The largest technology stocks were the obvious winners, but cryptocurrencies and real estate took off too. The mindset was to buy riskier assets because inflation didn’t exist, and with yields near zero on bonds and money market funds, you were losing money on your cash. In a higher inflation and rising interest rate environment, riskier assets get sold, and investors gravitate toward safer investments. We saw this in 2022.

Balanced Approach

When it is difficult to decide between an income or growth approach, then a great alternative is a combination of the two. This simply means having 60% of your portfolio invested in stocks and 40% invested in bonds, alternatives, and cash. This strategy worked great from 2019-2021 but did not work in 2022 because of the massive increase in interest rates and the selloff in bonds. Now that the bond market has recalibrated and yields are so much higher, today is a much better entry point to build a balanced portfolio. You may be able to get a 3-4% cash flow stream with good diversification and less volatility, too.

The Bottom Line

Investing isn’t easy, particularly after a year like 2022, but as our Chief Investment Officer, Michael Dow likes to say, “volatility is the price we pay for long-term wealth creation in the markets.” It is time in the market that counts, not timing the market. Nobody can perfectly time the market. In fact, if you miss the best five trading days of the year, you will make significantly less money over the long term. However, having said that, you also need to sleep at night with asset allocation strategies that allows you to do that. If you get that piece of the puzzle right, hopefully, you’ll be able to retire comfortably down the road.

READ — Mapping Out Financial Success with Retirement Planning

 

Thumbnail Fred Taylor HeadshotFrederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results.

The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.

What Does a Recession Mean for Your Finances? 

For some advisors, two negative quarters of Gross Domestic Product means we are in a recession. Other advisors are waiting for the National Bureau of Economic Research (NBER) to officially declare one. NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

The problem with waiting for the NBER to proclaim a recession is that by the time they do, it may be too late to improve your finances since there is typically several months of lag time before their announcement. Although recessions are challenging, there are actions you can take today to help mitigate the potential long-term damage.

READ — Does an Inverted Yield Curve Portend a Recession?

Credit Card Debt

According to LendingTree, the average annual percentage interest rate offered with a new credit card today is 21.59%. This is the highest interest rate since LendingTree began tracking rates monthly in 2019. There is no reason to pay this rate if there are other ways to pay for credit card debt. 

It may be prudent to pay your monthly bill early so you can avoid being charged this outrageous amount of interest. If you need to borrow from somewhere else to pay credit card bills, it could mitigate the amount of interest you will pay. Home equity lines, brokerage margin accounts, or personal bank lines of credit will only cost 5-6%, a mere fraction of what credit card companies charge.

Retirement Accounts

As tempting as it might be, try to avoid taking money out of your retirement accounts to cover your monthly bills. Your 401k account(s) and IRA(s) are for retirement only.  There are substantial penalties for taking money out of retirement accounts before age 59 1/2. Early withdrawals are subject to inclusion when calculating gross income; additionally, there is usually a 10% penalty.

However, you may be able to use IRA funds to pay your medical insurance premium after a job loss. You can take a hardship withdrawal from your 401k if the plan is held by your employer. It may be best to leave your retirement accounts intact growing tax-free until age 72. At that point, you are required by law to begin taking annual withdrawals.

Adding to your 401k out of your bi-monthly paycheck, particularly if your employer matches, may be beneficial. You could also make the maximum annual contribution to your IRA at the beginning of the year if you are able. Additionally, you could split the maximum annual contribution limit between a traditional IRA and a Roth IRA, or just go all-in on either. If you expect your tax rate to increase in the future, a Roth IRA would be your best bet.

Cash

The general rule of thumb is to have some mattress money or cash to cover up to six months of living expenses. This money is set aside for the purpose of weathering emergencies. During a recession, you may want to increase this amount.  If possible, stashing away a year or 18 months’ worth of savings for living expenses could help provide peace of mind.

The good news is that for the first time in years, you can buy the one-year treasury bond yielding over 3%. Better than that, you can buy I-Bonds, which are referred to as inflation-protected bonds. The current yield on I-Bonds is 9.62%; however, there are some limitations. You can only buy these bonds in $10,000 increments per individual family member in a given calendar year. Also, they can’t be redeemed for a year, and if you withdraw funds within five years, you will owe three months of interest.

Spending

Recessions give all of us a great excuse to cut back on our extra big-item spending. Ask yourself if you really need to take that trip, buy a new car, or remodel the house this year. Frankly, you probably don’t need to do any of those things. Now is not the time to take on extra debt or spend more than you make. If the recession lasts long enough, odds favor inflation coming back down, and if you can wait another year or two, airfare, new cars or remodeling expenses could be much lower than they are today. 

Although economists have varying opinions about whether or not we are in a recession, the stock, bond, and housing markets are signaling that we are in one currently or are rapidly heading in that direction. We are in a bear market, the yield curve is inverted, and the bidding wars for new homes are long gone.

Now that you know this, it may help to curtail your spending on large-ticket items, pay off your expensive credit card debt, keep contributing to your retirement accounts, and save 12-18 months of your living expenses. Also, you could invest emergency cash into I-Bonds or the 1-year treasury bond. Recessions don’t last forever, but it is better to be prepared when they inevitably come.

 

Thumbnail Fred Taylor HeadshotImportant Disclosure: 

Frederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

Does an Inverted Yield Curve Portend a Recession?

The last time I wrote about the bond market was five years ago when interest rates were about to become inverted. When this happens, it simply means you can get a higher interest rate on a shorter maturity bond than on a longer maturity bond. For example, if you wanted to buy the 2-year Treasury bond today, the government would pay you 3.18% in interest. If you wanted to buy the 10-year Treasury bond, you would only get 2.95% in interest. Doesn’t make sense, right? Why would you tie up your money for an additional eight years and receive less in interest? You wouldn’t — unless you think a recession is coming. Guess what? The bond market is now predicting a recession. In fact, we may already be in one.

Today, bond investors think the Federal Reserve’s recent aggressive interest rate hikes will slow down the economy enough to throw it into a recession. We have already seen mortgage rates jump from 3% to almost 6% in the first half of 2022. This means numerous first-time homebuyers may not qualify for a new home. Interest rates on auto loans and credit cards are much higher, too. Anybody who borrows on margin from their brokerage account is paying an extra 2-3% from just a year ago.

These higher interest rates are going to make things a lot less affordable. If things get too expensive, consumers will think twice about making purchases. We are also starting to read about layoffs from the big tech companies in Silicon Valley and a slowdown in hiring on Wall Street. With unemployment at an incredibly low 3.6%, companies will ultimately need to lay off workers to maintain current margins and profits.

If the recession gets bad enough, the Federal Reserve will eventually have to cut interest rates to stimulate the economy. The irony is the Federal Reserve needs to raise interest rates high enough to kill inflation, slow down the economy, and cause higher unemployment, only to turn around and start cutting rates again. This interest rate cycle may take the next 3-12 months. In the meantime, investors in the stock market, homeowners, and workers will likely suffer.

Inverted yield curves are rare occurrences, which is why investors and the media pay such close attention to them. It happened in 1991, 2002, 2008, and most recently (and briefly) in 2020. There is also a very strong correlation between recessions and bear markets. We had bear markets in 1991, 2002, 2008, and in 2020. The difference this time is we are already in a bear market. Let’s see if the inverted yield curve is right: a recession might be just around the corner.

 

Thumbnail Fred Taylor HeadshotFred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.

 

Important Disclosure:
Frederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.

Recession, and Securing Investments

The one constant investors can count on in any market is that conditions will change. That’s true even for the real estate market, which tends to be more stable than stocks. Despite multiple years of a seller’s market and a growing economy, the United States is now expected to enter into a recession.

What’s an investor to do? Short of consulting a crystal ball, investors can plan ahead by following trends, consulting real estate reports, and checking local listings for signs that the market might be cooling in your area.

With careful planning and adaptability, a savvy real estate investor can continue to build their wealth even during a downturn in the market. Here are five ways to prepare for — and survive — a recession as a real estate investor. 

Revamp Rental Properties

During a recession, particularly when the housing market takes a downturn, it’s important to think outside of the box when it comes to earning income from rental properties. Make your property stand out from others on the market to ensure your property keeps tenants instead of remaining empty.

You can make your property stand out by offering amenities that are appealing to renters, such as free parking and updated appliances. Do some research in your local market to find out what specific amenities will be most appealing. As you do, be sure to strike a healthy balance with your budget — you don’t want to overspend on your expenses in the pursuit of making your property appealing.

Building personal relationships with tenants can also go a long way toward building loyalty. Establish an open line of communication in which they know they can reach out to you and receive a quick response. You can also build trust by being open about changes in the lease and encouraging tenants to have input when forming the agreement. 

Invest in More Low-Risk Assets

When faced with a recession, investors can shift their focus to low-risk investment opportunities, such as Real Estate Investment Trusts (REITs). REITs are companies that own and manage multiple income-producing properties, such as shopping malls, industrial parks, and apartments.

Similar to the stock market, as an investor you can buy shares of these portfolios in exchange for proportional dividends paid out based on what all of the properties earn. REITs offer investors stability by having multiple assets, reducing the dependency on income earned from a single property. At the same time, they’re a passive investment, requiring little effort or input from investors.

Real estate offers various investment opportunities that go beyond rental properties and flipping homes. By diversifying your real estate holdings to reflect this variety, you can build a stronger portfolio that can withstand a recession.

Have More Liquid Funds Available

Going into a recession with more liquid funds available — that is money you have readily available — can be a benefit to real estate investors. A downturn in the real estate market presents a prime opportunity for investors to purchase new properties or buy into investment properties at a low price.

At the early signs of a change in the economy, it may be a good idea to divest some of your less-liquid streams of income, such as selling a rental property. Know the best websites available for buying and selling homes in advance so you’re ready to sell when the time comes. 

Diversify your Real Estate Portfolio

Real estate offers various investment opportunities that go beyond rental properties and flipping homes. By diversifying your real estate holdings to reflect this variety, you can build a stronger portfolio that can withstand a recession.

Rather than keep all of your investments in traditional real estate transactions, you can look for alternative options. This could include buying shares in commercial parks or a unit in a real estate cooperative, which can include parcels of land, single-family homes, or multi-family units. By partnering with other owners and investors, you can reduce the amount or risk you take on, which gives extra peace of mind in a cool market.

Focus on Long-Term Planning

Whether a market is in good or poor health, it’s important to remember that investing is a long game. While you should also incorporate short-term goals, make sure to keep your focus on long-term financial outcomes as well.

One way to strike a balance is to set multiple goals for differing lengths of time, such as monthly, quarterly, annually, and longer. Include plans and goals for both 10 and even 20 years into the future. Once you establish your list of goals, including how much you would like to have saved or invested by year, create a breakdown of projects and specific tasks that can be accomplished to help you achieve those goals.

While making these goals, consider possible hiccups that could get in the way, specifically related to a recession. For example, if you have a rental property, create projections of what would happen if your tenant was late in rent by 30 days, 60 days, or 90 days. Look at how that would impact your overall investment, and then identify ways to keep that from happening, such as creating a payment plan with your tenant to help you recover costs more quickly.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.

Recession, and Multifamily Rentals

With the Federal Reserve raising interest rates to dampen inflation, many pundits are predicting that the U.S. will enter a recession soon. So what impact would that have on multifamily rental properties, especially ones in Colorado?

After all, multifamily investment rentals are one of the biggest drivers of the ongoing Colorado real estate boom. In Colorado Springs alone, multifamily rents have skyrocketed 17%, year-over-year as of Q3 2021.

Owing to this, new construction is scrambling to keep up with demand. People are pouring in from more expensive cities like New York, San Francisco, and even within Denver, where cost-cutting measures like negotiating down real estate commission or using innovative new home-trading startups like Reali, still aren’t enough to get them into a home.

The next post-recession landing will likely be a lot softer than 2008’s, and many experts are already calling it an economic “stabilization” rather than a full-on crash.

1. Multifamily rentals might weather the storm.

While the last recession was pretty tough on the multifamily rental market, a big portion of post-2008’s adversity came about because of bad loans — and the industry hasn’t repeated that mistake. The next post-recession landing will likely be a lot softer than 2008’s, and many experts are already calling it an economic “stabilization” rather than a full-on crash.

That’s not to say that rents won’t fall for a short time, or that vacancy rates won’t edge up. But it almost certainly won’t be a wipeout.

2. Multifamily rentals could continue to rise through a mild downturn.

Part of this sunny outlook, is because multifamily rentals are such great investments in the first place. Commercial real estate, as a whole, is so strong that it’s outperformed the stock market over the past 20 years. For example, if you had invested $150,000 in the S&P 500 on January 1, 2000, you’d have a little over $486,000 today. Not bad!

But that same $150,000, invested in commercial real estate, would be worth over $775,000. And in the commercial real estate sector, multifamily rentals are arguably the crown jewel of investments. Apartments have outperformed every other type of real estate investment over the past 40 years — a period that includes five recessions.

The upshot? While a recession might dent the growth of multifamily rentals, they might continue to punch far above their weight class.

3. We might see a repeat of 2008 (in some ways).

A close study of the last recession yields a few more encouraging insights. A report by the Center for Housing Studies based at Harvard University looked at the impact of 2008’s Great Recession on the multifamily housing market. Their findings could be relevant to today’s situation.

In 2008’s recession rent growth stalled, and property values declined — but renter incomes declined even more. This changed the composition of renter households so that a lot of rental demand temporarily shifted to single-family properties, or even unconventional single-room rentals, and away from large multifamily properties. Vacancy rates went up, but recovered after a year. Rents fell 4% the first year and then began to climb again. If we see a recession this year, a similar fast decline/fast recovery dynamic could play out.

However, large multifamily property values did take a bigger hit than single-family properties. They declined by 40%, compared to only 32% for single-family, before recovering quickly.

Something for today’s owners to keep in mind — make sure you have plenty of cash in reserve for operating expenses so you can maintain your investment properly.

4. Low supply and falling renter incomes could buoy the multifamily rental market.

Still, the multifamily market remained fundamentally strong post-2008 because of the low supply of new housing hitting the market (which is still the case today), and renter incomes falling more than rents. This is usually the case in modern recessions, which means that even in a downturn, landlords and owners still have a lot of leverage.

One of the biggest hazards in 2008 was that many cash-strapped owners couldn’t afford to keep up maintenance, which led to their properties deteriorating rapidly, along with an increase in tenant complaints and turnover. That’s something for today’s owners to keep in mind — make sure you have plenty of cash in reserve for operating expenses so you can maintain your investment properly.

5. Multifamily rentals may turn out to be nearly recession-proof.

While multifamily properties took a big hit in the last recession, they came out of it faster, and better, than most other classes of investments. Many experts today consider multifamily rentals to be nearly recession-proof.

Why? Well, multifamily properties are incredibly cost-effective when compared to the same amount of single, separate units. Maintenance costs are a fraction of what they’d be if you had to maintain multiple single-family properties, and the amount of rent earned per square foot is much higher than single-family rentals. In addition to that, they come with very minimal risk compared to single-family properties. In a multifamily rental, you may have a vacancy here and there but you’ll always have cash flowing in from the other units.

So what can owners of multifamily rental investment properties expect if the economy does fall into a recession in 2022 or 2023?

Based on past recessions, they’ll take a hit in the short-term, but recover very quickly, and at a faster rate than other types of real estate. Scant new construction will keep supply low, demand high, and lead to a fast price rebound. Renter incomes will fall more than rents, which is good for landlords and owners. Any uptick in vacancy rates will prove to be temporary.

Overall, their multifamily investments will come out of it stronger than before — a profile that’s fitting for what many are just now realizing is the gold standard of real estate investments.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.