One of the main reasons I fell in love with writing about investing is because at times, financial media can be like a carnival funhouse mirror. Sometimes it distorts reality, and other times it’s downright scary. But you deserve better.

Consider last year’s recession ramblings by Wall Street experts – how many keyboard strokes were squandered on a recession that never showed up to the party? (Google churned out 128 million worthless results for “2023 recession.”) 

All the fear-mongering did was make people anxious, which is click “baity” and counterproductive. And when we’re talking about people’s wealth and financial well-being – it’s not just bad journalism, it’s borderline unethical.

Imagine last year you panicked and ditched your stocks for cash to avoid the “guaranteed” recession. Well, you just missed up to 20% of portfolio gains. For a $1 million portfolio, that’s a whopping $200,000 gone – poof! Ignorance isn’t bliss. Ignorance is financial pain.

Now, some contrarians might argue, “But what if there really was a recession? They’d be helping warn investors.” But here’s the kicker: even if experts were right, they’d still be hurting people. Let me explain why.

Why Recession Sirens Don’t Help Investors

The big secret? Nobody – seriously, nobody – has a crystal ball that predicts recessions accurately. Not even the most seasoned economists. Recall from Monday’s blog post, the Philadelphia Fed survey, for instance. Over 80 years, they’ve never nailed a single recession a year in advance. Meanwhile, they missed the boat on the recessions of 1990, 2001, & 2008. So those recession predictions? They’re about as useful as a soggy newspaper.

Forecasts of an impending recession also aren’t helpful because in order to profit from them, you’d need to time the market not once, but twice. First, you’d have to bail out of stocks before the recession hits. Then, you’d need to hop back in at the perfect moment. And by the way, as the table below illustrates, stocks tend to recover before the recession officially ends because the stock market is forward-looking. 

Let’s rewind to the ‘08-’09 recession. Stocks hit rock bottom on March 9th, 2009. But guess what? The recession didn’t call it quits until June 2009. By that time, stocks had catapulted higher by 36%.

But the real kicker is the National Bureau of Economic Research (NBER) took its sweet time declaring the recession was over – more than a year later, in fact. By then, stocks had skyrocketed 70% from their lows. Waiting for that “all clear” signal cost you dearly. The table shows a similar story for the most recent recession in 2020.

Don’t Swerve to Avoid the Next Recession

Remember your driving test days? Picture this: you’re cruising along, and suddenly, a deer leaps onto the road. Instinct kicks in – swerve, right? But the experts say, “Hold your horses!” Swerving might land you in a ditch or worse. Staying in your lane – even if it means a deer collision—usually keeps you safer. Plus, most of the time, you won’t even hit the darn deer. 🦌

Now let’s take this driving lesson principle and apply it to investing and recession worries. Stay with me, don’t be a deer caught in the headlights – sorry that was bad, I just couldn’t help myself. 😁

When investors get nervous about a recession or market downturn (deer running across the road), many instinctively want to alter their portfolio (be more conservative, hoard cash, etc.) to avoid the recession (hitting the deer). But here’s the truth: swerving your portfolio to avoid the recession (deer) often leads to worse outcomes. How many recessions have been predicted that never showed up? (Ahem, 2023, I’m looking at you.)

The best preparation for the next recession is strong diversification so all your investments don’t move in the same direction at the same time. Also, ensure the riskiness of your portfolio and your investing time horizon are aligned. And remember, the next time a recession deer crosses our investment highway, don’t swerve. We’ll see more deer than we hit, and the damage from dodging the recession will likely hurt more than the recession itself.

Castle Quote: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”

– Peter Lynch