If you are worried about recession in your retirement years, you should read this.

In the course of my work as an independent financial adviser, I have done retirement planning for many people. In our initial discussion, most people tend to plan their retirement using very optimistic assumptions. But I always share with my clients the story of “the horse-may-talk.” And most people take it as a joke.

The reality is, in good times when the economy is booming, you get your job promotion, your investment grows, everything looks rosy. But when the crisis comes (such as now), something totally unexpected may happen, and if you don’t handle it properly, your retirement plans will be derailed for years.

Retirement planning is not just discussions about investing. The fact is, it doesn’t matter if you invest or not, you will face a recession at some point in time. A recession may cause you to lose your investment capital or even to lose your job and income. It is a significant period in your life, so you should pay special attention to it. And I hope this article will provide some guidance to help you navigate through this period.

#1. A recession cannot be predicted

A crisis can start from anything, but its effects will depend on how people deal with it.

March 2020 may be a passing month to you with the inconvenience caused by the global outbreak of COVID-19. But the damages to the financial market and your personal finances are far from over.

There were global pandemics in the past: there was an oil crisis before, there was a debt crisis before too. But there has never been a time when 3 crises happened at the same time.

How could this possibly have happened?

To answer this, I have documented my thinking process in some of my blog articles:

• In January, when the coronavirus was largely contained in China, the market’s attention was on its economic impact on the stock market, drawing a comparison with the 2002 SARS period.
• In February, China’s decisive measures showed results and the stock market shrugged off the worry and rebounded quickly.
• In March, the virus spread into Europe and the US. A global pandemic was declared. At the same time, the Saudis started the oil price war which triggered the debt crisis and the stock market plunged. In fact, it was not only the stock market that suffered. All investment markets fell at an unprecedented speed. It didn’t matter whether you were a good company or a lousy one; it didn’t matter whether it was a high-quality bond or a junk bond; even the so-called safe havens, gold and the US treasury, were not able to escape.
• In April, with almost all major economies in the world in “lockdown” mode, Recession, the “R” word (which we do not want to speak about), started to linger in everybody’s mind.

Before we try to seek the answer to the question: “Is a recession imminent?”, we need to think about these points:

• Is the virus as deadly as the media portrayed it when it started in China?
• Why were Europe and the US not prepared given 3 months’ lead time?
• Is a global lockdown warranted to deal with the situation?
• Are governments around the world dealing with it rationally using long-term plans? Or is it a ‘give-in’ due to short-term political pressures?
• Why is the oil price war between the Saudis, Russia and the US happening at this time?
• Will Donald Trump ease the US-China tension or he still want to charge on?
• What else don’t we know?

If you take some time to think about these questions, you will quickly realize that although the coronavirus was a catalyst, it is not a cause of any recession.

Why do we see so many rumours, fake news and doomsayers nowadays? Because there are always people who will profit from it. The world is a zero-sum game. When someone loses, somebody else gains.

You need to be extremely careful when you hear some hedge fund managers openly telling you that they are “selling everything”. Why would they tell you what they are positioning? Since when are they so willing to share their trade secrets?

You should also be fearful of the “best stock ideas”. Is it just to lure you in to subscribe to some stock recommendation services; or is it that the big players are creating hype to offload the shares to you?

If you think about the trillions of dollars central governments around the globe have handed out to their citizens for “immediate relief”, you should really be concerned with who will ultimately pay for this bill.

If you think about the zero interest rate environment and the collapses of asset prices around the globe, you should ask, “is a “guaranteed” CPF interest rate sustainable?“

Even if we have all the knowledge of this pandemic, we cannot calculate the greed and fear which will spiral to a self-fulfilling process to drag the world into economic hell.

If a global recession does happen sometime in the future, we only have human madness to blame.

#2. There is no playbook for recession

We humans like to seek patterns. We like to use what has happened in the past as our guide for the future.

On March 8, Warren Buffett was interviewed for his opinion on the stock market volatility occurring then. He said that he had only seen a “circuit breaker” once in his lifetime (in 1987). (Circuit breakers are regulatory measures to temporarily halt trading on an exchange, which is in place to curb panic-selling.)

The 89-year-old confidently made this statement,

If you stick around long enough, you’ll see everything in markets.

Warren Buffett obviously hadn’t seen everything. In the next 10 days after his interview, he witnessed 5 more circuit breakers. Just imagine having a conservation with Warren Buffett:

• On March 8, 2020: Warren Buffett said, “I have lived 89 years, I have only seen one circuit breaker”;
• On March 9, 2020: Warren Buffett said, “I have lived 89 years, I have only seen two circuit breakers”;
• On March 12, 2020: Warren Buffet said, “I have lived 89 years, I have only seen three circuit breakers”;
• On March 16, 2020: Warren Buffet said, “I…”;
• On March 18, 2020: Warren Buffet said, “I am too young…”

Many people talk about the possibility of a recession nowadays, but few can explain exactly how it will happen.

For example, do you know how many days it took for the US stock market to tumble nearly 30%?

• It took 360 days during the 2000 dotcom bubble.
• It took 250 days during the 2008 financial crisis.
• It took only 19 days in the current 2020 crisis.

The fact is that every recession is different, partly because it is man-made – as I have explained earlier.

You can think about a stock market crash and recession like a thunderstorm. You can see clouds gathering, but you may not be able to tell exactly when and how big the rain is going to be.

The financial media and bloggers, who have the benefit of hindsight, typically paint pictures of what happened in ways that make what has happened seem obvious. However, it is an entirely different matter when one is in the moment.

#3. You can do everything correctly but still lose money in a recession

In January 2019, I wrote an article: “5 outrageous predictions for 2019”:

1. The US stock market may not have reached its lowest level (after the Dec 2018 crash).
2. The China stock market could see a double-digit return.
3. Gold may shine again.
4. Singapore’s property market will experience a liquidity crunch.
5. A Regular Savings Plan is a bad strategy.

As it turned out, these predictions may be more applicable now. Below is a screenshot of my investment letter to my clients in Jan 2019. At that time, the US stock market was already 140% of the US GDP. It was a much worse situation at the beginning of this year.

But even though I was cautious with the US stock market, I was not able to prevent the portfolio’s short-term fluctuation as everything else fell apart in March (as shown in the first section).

#4. Accepting a recession or market crash is part and parcel of your investing journey.

Losing your hard-earned money in a market crash is painful. I get it. But I want to tell you this:

However ugly this particular market event gets, it likely will not amount to a blip on the radar when looking at your lifetime of investing.

The speed and scale of the latest US stock market crash resemble the 1987 crash. If you look at the two charts below, the left chart shows what happened in the US market in 1987. Looks as scary as today right?

But if you look at the right chart, it shows what has happened since then. I bet you can easily find the 1987 crash, which is just a blip in your investment journey.

Remember I said you would encounter 6 to 7 bear markets in your investment years? When people talk about the long term stock market return of 6% to 8%, it has already factored in the bear markets. A stock market crash is disastrous only if you give up investing (holding 100% cash) after it happens!

#5. Be willing to cut your losing investment.

When do most people lose money in investing? Is it because they cannot spot good investment opportunities? No.

It is because they were holding their losing investment for too long.

In the movie “The Hunger Games”, during a discussion about the Capitol’s strategy for the Hunger Games, President Snow said,

Hope, it is the only thing stronger than fear. A little hope is effective, a lot of hope is dangerous.

When you make a 10% profit in an investment, you tend to sell it as soon as possible. You worry that the profit may disappear. But when you end up losing 50% in an investment, most people tend to hold on the losing positions.

Sometimes the stock prices bounce back, but most of the time the share price just gets progressively worse and worse year by year. You need to understand that when a share price goes down, it goes down for a reason. Anchoring your investment decision based on your purchase price is a deadly mistake.

No matter what investment strategies you use, you will end up in a period with consecutive losses. In a recession period, while the loss may be prolonged and magnified, it is more dangerous if you are holding some individual company’s stock because the company may end up bankrupt.

#6. Don’t fall into a value trap

While people who have suffered losses last month are still feeling the pain, people who have cash on hand might be excited that “the moment has finally come”. The voice gets louder when there are so many “investment gurus” selling courses to teach you how to “buy value stocks”.

We need to approach this question very carefully. You need to be careful if you are not “mature” enough to handle a crisis. It is the same thing with people who have never seen a property market crash. They will tell you that “property prices always go up”. The same goes for REITs, blue-chip stocks, value investing, and ETF investing. You often receive “free advice” from people who have not seen a market crash over their whole investment journey. They simply don’t know what they don’t know.

I want to remind you that if you are not experienced enough, this is not the time to take a crash course and jump in. Rather, I recommend you to take a look at my recent articles written not long before the crisis:

• Why you can still suffer massive loss even if you invest in REITs.
• Why buying stocks during a financial crisis is a bad idea.

It is not that the concept of “buy when others are fearful” doesn’t work. It is that you cannot handle it.

As a financial adviser who specializes in retirement planning, discussing investment strategies for retirement is my daily conversion with my clients. But years of experiences have taught me that no matter how convincing a retirement strategy may sound, everybody is spooked when the judgement day comes.

Some people may talk about DCA (Dollar Cost Averaging). Buying when the market is heading down. It is easier said than done.

• First of all, this is assuming that you have an unlimited supply of cash.
• Secondly, you must have a strong heart.

From my experience, most people do not have the discipline to carry on this uphill task. Not to mention that you may not even have a stable income during a recession.

#7. Prepare for the worst

In my February GMC updates, I described COVID-19 as a black swan which wakes up the grey rhinoceros which is a potential debt crisis.

The traditional global recession was typically caused by one of the two sides of the economy having a problem:

• A supply disruption – high inflation, sharp rises in commodities prices (such as oil crisis)
• A demand disruption – falling asset prices, lower spending power

Most past recessions were either a supply disruption or a demand disruption. But in today’s unique situation, the world economy is facing disruptions from both sides. So we are probably facing one of the most difficult economic challenges in our lives right now.

In my book “FIRE Your Retirement” (Published in 2018), I said this in Chapter 13,

I am not saying that Singapore’s economy is going to suffer from now on, but the GDP has declined over the past few years. As far as you are concerned, if your retirement savings are still built on the assumptions of the continued boom of Singapore’s properties and blue chip stocks based on past history, you should be worried. Do you have the knowledge and experience to face the future financial challenges?

The question you should ask yourself is not whether there will be a recession, but how to handle it.

Let me summarize…

I am not sure if you have been watching Korean dramas during this period of Singapore’s “circuit breaker”. But I chose the opportunity to enjoy a slower-paced life and watched “Crash Landing On You” with my family.

In Episode 5, On the way to Pyongyang to get Se-ri’s passport photo taken so she can leave the country, the train has a power outage which forced the couple to spend the night outdoors. It led to a heart-to-heart talk where Captain Ri shared that he didn’t dare to think about the future. Se-ri said this,

Sometimes the wrong train takes you to the right direction. It was like that for me, too. Throughout my life, I always felt like I was on the wrong train. One time, I wanted to give up. I didn’t want to go anywhere. So I thought of jumping off the train. Look where I am now. I took the wrong train again, and a very wrong one at that. Still, you should think about the future, even if things don’t go as you wish. I hope you arrive at the right station, no matter which train you take.

When I graduated in 2003 and tried to get my first job, it was the post-SARS period when every company was laying off staff; when I was doing well as a financial consultant with AIA in 2008, the insurance giant nearly collapsed due to the global financial crisis. We are not always so lucky to get into unknown lands without breaking down. But look at where I am today, and these are just the blip in my life’s journey.

I wrote this article during the 2016 stock market crash then and I said this,

Even if you don’t know how many red lights you are going to encounter before you drive out, you will still set out and you always reach your destination, if you know where you are going. – Ivan Guan

A recession need not be scary. You can think about it as wealth redistribution and a system cleansing process. It may make the road bumpy, but it also gives you a once in a decade opportunity to boost your wealth if you are clear about your direction and handle it correctly.

Additional reading: How to set a SMART goal for your retirement.

There is no need to bury your head and pretend that it won’t happen. Because on your retirement journey, you will encounter a few more recessions or market crashes anyway. You should learn the lessons now so that you can make fewer mistakes in the future.

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In my next article, I will discuss more how a recession is formed, how it worsens, and how it will unfold. If you are interested, subscribe below for the next updates.