We are officially in a recession. Today, Rick Bloom takes a look at the historical context of recessions. Then, we run through seven things you should do in our current climate.
As always, Rick answers listeners emails. Today, we talk about emergency funds in short term bonds and using banks as trustees.
If you have a question for Rick Bloom, you can email him at Rick@RickBloomTalksMoney.com
Bloom Asset Management website: http://www.bloomassetmanagement.com/
Rick Bloom Talks Money Episode 5 - 7 Things To Do In a Recession
Hello and welcome. I'm Rick Bloom. Thanks so much for joining me for Rick Bloom Talks Money. I'm an attorney, certified public accountant, financial advisor, and our podcast is dedicated to you; helping you make better decisions with your money, because I believe money looks better in your pocket than it does anywhere else.
On our podcasts we're always going to take your questions at the end of the podcast. If you have questions, email me, Rick@rickbloomtalksmoney.com.
And today's topic we're talking about the recession. It shouldn't surprise anyone that it has been formerly announced that we are in a recession. So, I guess the first question is what is a recession? And, you know, the definition of a recession has changed over the years. The current definition is a significant decline in economic activity spread across the economy and lasting more than a few months. That is the current definition, and the official scorekeeper to determine whether a recession has occurred or not is the National Bureau of Economic Research. It's a private, nonprofit, nonpartisan research organization, and they say we're in a recession, which means we are in recession. And there's things that you need to do to protect yourself.
First of all, it's important to understand since World War II, we've had 12 different recessions and 100 percent of the time, 100 percent, the economy has recovered, stock market have recovered, and we reached record highs. Typically, the average recession is about 10 months.
In the last 30 years, we’ve had three recessions. Go back 30 years ago, July 1990, we entered a recession that lasted until March of 1991. And the cause of that was a spike in oil prices because Iraq invaded Kuwait and that sent oil prices skyrocketing, caused manufacturing to have problems and also a decline in trade, and that sent our economy into a recession.
The second one in the last 30 years was in March 2001 to November 2001. And that one was affectionately known as the dotcom recession. We all remember back then, all you had to do is put dotcom next to a corporation's name and the stock went wild.Well, reality finally hit. And all the dot coms collapse because they weren't making money and they couldn't pay their bills. And at the same time, we had the 9/11 terrorist attacks and that caused the recession. It was a short recession but a recession, nonetheless.
The third recession in the last 30 years was the Great Recession, and that was December ‘07 through January ‘09. And that was caused by the housing bubble and the subprime mortgages. We all remember coming home from work and every day there would be solicitations about borrowing money. Across the board people were over leveraged and that caused the shakeup in the, economy.And just as an FYI, 11 years ago, this month, the Dow was at 8,500. And today it's over 26,000.
If you look at recessions, there are certain things that are common to recessions, and what you see is rising unemployment. For those who keep their jobs there generally is a decline in pay and benefits. Stock markets declined during a recession, and you also have tightening credit. We have all three of those in the current recession.
Although recessions are somewhat similar, they are somewhat different as well, and this one has a fair number of differences. And first of all, what's important to remember about this recession? It wasn't caused from the financial markets or a problem in the economy. This is a healthcare crisis, and that's primarily what caused the recession, was healthcare, not anything fundamentally wrong with the economy. Also, the decline in economic activity in this recession was faster and deeper than just about any other recession. Think about it, unemployment jumped, significantly over a very short period of time.
Also, three in this downturn it's broader and it affects more people than the other recessions. I don't know one person who is not affected by this recession; it has affected everyone.
And fourth, what makes this recession so different? If you take a step back and think about this, this is a self-induced recession. It's similar to a medically induced coma. This was caused by the government deciding to shut down the economy. When it comes to a recession for you and I, the real issue is how do we survive it to make sure that we don't do long-term damage to our portfolios and our financial affairs. And that's why there are seven things that I think you should be doing now to protect yourself during this recession.
And the first thing that you should do is a cashflow statement and a net worth statement. Cash flow, you have to know where your money is going. You have to know where your money that comes into your household, where it's going. And if you don't know that, it's very hard to plan. And also, this comes at a great time because we've all been quarantined for the last three months, we look at things a little differently. Things that were important to us before may not be important. So, it is important that you go through all your expenditures and list them, know exactly where your money is going. And then what you should do is divide it into two separate categories: essentials versus non-essentials. Essentials - things like your mortgage, your car payment, groceries, utilities; nonessentials - vacation, lifestyle type expenditures, dining out. You want to have these things so that you can start looking at being more efficient with your money, and unless you know where it's going, you can't be more efficient. So, take some time and do this cash flow statement.
At the same time, you need to do a net worth statement. A net worth statement is nothing more than a listing of all your assets and all your liabilities. And when it comes to assets, it's pretty easy. You could look up, go online, see what your stocks and your investments are worth. Your house, you can go to places like Zillow and get a good ballpark estimate. Remember you want to have fair valuations, and where that comes into effect more than anything is in things like collectibles. Just because you think something is of value doesn't mean others do.Remember when we're talking about putting things down on our net worth sheet, it’s what we can reduce it for cash. You may have a stamp collection that you think is worth thousands of dollars. If no one will give you more than $250, that's what it's worth. So, you have to be very careful with valuations.
On the other hand, the other side of the, net worth sheet is your liabilities. And on your liabilities, you have to know what interest rate you're paying, what are the terms of the payment and also the tax effect of it. Having a net worth statement and a cashflow statement is the basic in helping you plan and getting through this recession.
The second thing you need to do, you need to look for ways to reduce your household expenditures. And I think there's two areas that you really should focus on. One is streaming services. I know people that sign up for every streaming service, they sign up because it's 60 days or 90 days free, and then they never cancel it. Ah, it's only $20 or $30 a month and they keep paying it. Well, you and I should go through all our streaming services and all our subscriptions to decide what makes sense, what doesn't make sense. You may be surprised that you're paying for things you don't use. Why pay for something you don't use?
The second area I think in looking at expenses where you can save some money is your homeowner’s and automobile insurance. I’m amazed that people do not shop their homeowner’s and auto around, and you need to, because you can get competitive bids. In the old days, you couldn't do it. But today with the internet, you could take advantage of it. Look for ways to bundle your auto and homeowners. There are substantial discounts with companies when you do that. And in addition, whenever you shop around your homeowner’s and auto policy, what you need to find out is what discounts are available. I know I asked my agent all the time, what are the discounts? I know some people don't like to appear cheap, get over it. There's nothing wrong with trying to save money and you can save money by going through your expenses. Look at each and every one of them and decide what you need, what you don't. Because remember in a recession, and even though this may be a short recession, it's going to be a while until the economy fully recovers, and if you could save money, why not?
The third area is life insurance. I’m amazed that people have life insurance when they don't need life insurance. First of all, keep this in mind, when we talk about insurance, insurance is not an investment; it's a means of covering risk. That's what insurance is. With life insurance the risk we're covering is not that we're going to die, because we all know we're going to die, that's not the issue. The issue is if we die, does anyone lose out financially? If no one loses out financially, why are you paying for life insurance? So, I think you, first of all, look at your situation and decide whether you need life insurance. If you don't need it, why are you paying for it? I know what some people say. Yes, but if I cancel my insurance, I've paid for all these years. So what, you've paid for your homeowner’s insurance all these years, what does it make a difference? We're looking forward, not back. So, if you have cash value in your policies, that's your money. You can get that money out, spend it in any way that you choose. Now you do have to be sensitive to the tax consequences. Unfortunately, some insurance agents don't like to tell you the facts about it and they say, oh, it's all going to be taxed to you if you cancel out the insurance policy; that's not true. You have a basis just like you do in a stock. And your basis in an insurance policy is the value of all the premiums you've paid. So if you have a policy and let's say it has a $26,000 cash surrender value, and you've paid $25,000 in premiums. If you cancel that policy and they send you a check, you're only going to pay tax on $1,000, not the full $26,000. So, you should look at the idea of canceling life insurance policies that you do not need. And again, it's not a matter that you're going to die; we're all going to die, but not everyone needs life insurance. And keep this in mind, you need more life insurance when you're younger, when you have a family and you have people on your payroll, that's when you need more life insurance. As people enter retirement, most times they don't need life insurance. They can cancel the policy, save on the premiums.
If you do need life insurance, it's important that you have not only the right amount, but the right type of insurance. I get this all the time. People say how much life insurance should I have; isn't there a magic number? Well, there is a magic number if you talk to the agents. But that's not who we want to talk to. We want to look at your individual situation. Depending upon whether someone has pensions, what their other investments are. The issue is you cannot insure for loss of love and affection, you are insuring for lost finances. And that's what you need to focus on when it comes to life insurance. And one way to save money, significant amounts of money in life insurance is to make sure you have the right type of life insurance. I recommend for most people term insurance, it's the cheapest and it's the best type of life insurance. And keep this in mind, if you bought a policy 10 years ago, you could cash that out and get a new policy if you need it. And when you shop life insurance around, just don't go to your local agent. You should also go online and look at some of the deals that are available. You’d be surprised on some of these websites how much you can save by shopping around your life insurance. And again, life insurance is not an investment. Life insurance is a means to handle risk.
Number four -- reducing debt. Debt has a way of strangling us, and in this world, we should be looking for ways to reduce our debt as much as possible. We've talked about this in the past about refinancing mortgages, which make sense, particularly with a low interest rate environment that we're in. And a lot of times when you refinance, if you have charged card debt, you can add that to your mortgage and use the extra money to pay off your charge cards. And when it comes to paying off debt, keep this in mind, the higher the interest is the debt you want to pay off first. If you have an 18½ percent charge card, you want to make sure you pay that off before anything else, because I can't think of any investment that will give you a guaranteed 18½ percent.
And one thing you should also do. If you have a balance on your charge card, look at the transfer balance deals that you see. You could transfer your balance on a charge card and some charge companies will give you a year free interest. So it allows you to pay and have that money go to the principal. Don't have loyalty to your charge cards; they don't have loyalty to you, why should you have loyalty to them? In fact, I think this is a good time to shop your charge cards around to make sure not only are using the right charge card for your situation, but the one that has the least amount of costs. If you're someone like me that pays their charge cards, you know, when the bill comes, so I never carry a balance on my charge card. I don't really care that much about the interest. I more care about what sort of perks am I getting? Am I getting miles? Am I getting cash back? On the other hand, if I'm carrying a balance on my charge card, the interest is important; it's much more important than the perks. So, if you haven't shopped around your charge cards, this is a great time. You know, we're going to be home a lot this summer, why not shop your charge cards around? And again, you'd be surprised how much you could lower your costs. And that's the key during the recession. We want to be in a position where we can lower our costs.
The fifth thing you need to do is you need to look at your cash emergency fund. I've said this in the past, it is so important that everyone have an emergency fund of money. My belief is you need three to six months of living expenses, at least. And for those of you that maybe in a situation where your jobs aren't as secure as you hope, you should be at that six months, even maybe nine months if you know that your job is going to be ending any time soon.Cash is important because you never want to sell your investments at an inopportune time. When you have an emergency fund, that's where you draw upon. So, you wait to sell your investments until the time is right.
When it comes to cash, you have to also just not throw it in your bank. You need to shop it around.Banks these days are paying virtually zero interest rates, and it appears that we're going to have this low interest rate environment for at least another year or two, so it does pay to shop your cash around. And you need to look at these internet banks. They are paying substantially more. Add they're federally insured and they're easy to deal with. And in fact, what I think you should also be considering doing is why not re-shop your banking relationship around. Just because you use this bank for the last 10, 20 years, who cares? Banks are different today and we're different. What you need to do is look at what services you're actually using from your bank. If you're not using many services, why are you paying for them? And the reality is how many people really go into a bank branch anymore? Things are different. It used to be that you got your mortgage through your bank, you got all your loans through your bank; that's not the case anymore. So, I think this is a great time to relook at your situation and shop your banking relationship around.
Look at your cash. Make sure you have enough as an emergency fund. If you have too much cash, you could consider investing it. And at the same time, you don't have to keep your cash where you bank, you can look for better deals. And there are much better deals with internet banks these days.
Six -- estate planning.I've read a few stories recently how loved ones couldn't deal with their loved ones because they didn't have the necessary power of attorneys during the Coronavirus. I cannot stress enough how important it is to have an estate plan and to make sure that estate plan is up to date. If you did an estate plan 20 years ago, more likely than not, it's not up to date these days, which means if something happens to you, family emergency, or you pass away, you're leaving more problems to your family and that's the opposite of what we want to do, particularly in a recession.
So, what I think everyone needs to do is one, make sure they have a medical durable power of attorney.A medical durable power of attorney basically allows someone to act in your behalf if you cannot act when it comes to medical issues. It is so important. And it's just not important that you have one, it's also important that your loved ones have one. If you have a child and they just turned 18, they're a legal adult. They need a medical durable power of attorney. If you're taking care of elderly parents, they need medical durable power of attorneys.So it's just not you, it's all family members that you need to make sure. And the nice thing about medical durable power of attorneys, you don't have to pay anyone to do one. You could do it for free. There are plenty of free forms. Michigan has a form called the Michigan Patient Advocate form. It's available in many places. You could download one from my website, bloomassetmanagement.com. It is important that you have medical power of attorneys.
At the same time, some other things you need to do when it comes to estate planning, you need to have a general durable power of attorney, which allows someone to act in your behalf if you can't do it. Then you also need to make sure that if you have a will, if you have a trust, that they are current, that your wishes are reflected in that. Not your wishes 10 years ago, but what your wishes are today.
In addition, some things that everyone should be doing with regards to estate planning is check your beneficiaries. You can have beneficiaries on your life insurance policies, your 401k's, you now can have beneficiaries on your brokerage accounts, through Fidelity, Schwab, Vanguard. You need to make sure that those beneficiaries are current and that you also have a secondary beneficiary. I cannot tell you how many times I deal with people and they have ex-spouses as beneficiaries, and it causes all sorts of problems.
You also need to check your deeds on your house. See how the deed reads. There are all sorts of different ways you could use deeds to avoid probate the whole bit, but it's important to know who owns your house. And people are always surprised when they pull out deeds to find out who owns their house.
Another thing with estate planning that I cannot stress how important it is, is a document locator. I deal with this all the time. People pass away, they have a family emergency, and people can't locate their assets. Particularly nowadays with the internet where people have so many online presence, they have different passwords, different logins. If something happens to you, how does someone know that information? It causes all sorts of anxiety to your loved ones.Make things easier for them. What you need to do is a document locator, a listing of where all your assets are located, and also, your user IDs and your passwords. And I know what someone is thinking out there. Well, Rick, I change my passwords all the time. Are you telling me I have to update my document locator all the time? And the answer is yes. Unfortunately, you need to do that. You need to stay current.
Again, the reason why you do estate planning, I tell people this all the time, and there's really one main reason. It's not to save on taxes, it's not to save on probate although, those are great goals. The reason you do estate planning is because you love your family and you want to make things as easy as possible on them in case of your death or in case of a family emergency. And that is something that you need to think about, particularly in times of difficult economic times that we're having, you don't want to cause more of a burden on your family. That's why it's important that you look at your estate plan. If you haven't done one, you need to do one as soon as possible. And again, it doesn't have to be complex; it can be very simple. You may or may not need a lawyer. You can get free wills. The Michigan Statutory Will is a free fill-in-the-blank will. And a lot of times when people have beneficiaries, they have the right deed, they don't really need anything more sophisticated. But you have to do something because you love your families and you want to make sure your families can get through any type of a crisis.
The last thing that, we all need to do is actually look at our investments and look at our portfolios.And the key is, as far as I'm concerned, and this is always whether we're in a good economy, a bad economy, the key is your portfolio has to reflect what you're trying to achieve as an investor, at all times. And as part of that, you have to also look at what risk you're willing to accept. This whole crisis may have changed your risk tolerance level. When your risk changes, your portfolio should change. So it's important that you look at your portfolio from a standpoint of, do I have the right allocations? Am I in the right risk category? If not, you need to make a change. Generally, the type of portfolios I like, I like more all-weather portfolios that survive all sorts of different economies. And that's why I believe in diversification. You need to diversify your portfolios.
I've read a lot of articles about how to get rich fast during this recession and things you could do, what's going to come out of this faster. As far as I'm concerned, whenever I hear a get- rich-fast scheme, mostly I consider it how to get poor, even faster. These get-rich-schemes just don't make sense. And again, remember what we're trying to do in a recession; we’re trying to survive it. We try to make sure that when we get through it, we're still in good financial shape. So when you look at your portfolio, don't let fear or greed dictate your investment decisions. Make sure you have the proper allocations and if you have the proper allocations, you're so much further ahead than anyone.
And remember this when it comes to your investments, and this is always important, your investments don't love you, why should you love your investments? There's not one investment you have in your portfolio that you shouldn't be afraid to sell. If it no longer fits your situation, why are you staying in it? You want to rebalance your portfolios, like you should do all the time. We're coming up to the end of June, six months since the beginning of the year. This is a great time to rebalance your portfolio and make sure you have the allocations. And whatever you do, don't panic during these times. We're going to survive this recession like we have every other recession. And again, you go back just 11 years ago, and you look at where the Dow Jones Industrial Average was - 8,500, and today over 26,000. And we've had some difficult times during that period.
The bottom line we're in a recession, it's important that we all take care of our financial affairs. And I believe if you follow these seven items, you're going to be able to survive this recession and get on the other side. And that's exactly what we want to do.
And always remember on this podcast, we want to provide you information that makes sense for you, that you could do that is going to put more money in your pocket. And that regard, I want to take a couple of questions that we received.
First was from Rob who's listening in Texas:
Hi, Rick. So glad you're back on the air, so to speak. Love your podcasts.
Thanks Rob. I've always said, and for those you don't know, I did a radio show in Detroit Metropolitan area for years. I've always considered myself the lucky one that I got invited to come into peoples’ houses to talk to them about their money and to help them make better financial decisions. That's exactly what I'm trying to do with this podcast.
Rob's question is: My question is regarding my emergency fund.In the past, instead of a savings account, you would suggest a good short-term bond fund to obtain better returns.Is that still your best recommendation, if so, do you have one or a few that I should look at?
Well, Rob, I do like the idea of, you know, leaving some cash in short-term bond funds. Short-term bond funds are, and when we talk about the term it deals with when they mature. The shorter the maturity, generally the less volatility in the portfolio. But I would say we need to go one step further. We need to make sure that we're going into short-term bond funds that have good quality. I think one of the things you look at, particularly in a recession, you want to stay with quality. So, I do like some of the short-term bond funds, but I want to go into the ones that have some quality. I'd look at a Vanguard Ultra-Short-Term, T.Rowe Price Ultra-Short-Term. Met West has a very good ultra-short-term bond fund. And I’d also throw in the Fidelity Ultra-Short-Term. And we're getting a little better yield. I would also tell you, you should shop around some of the online banks because some of the online banks has some very good gimmicky rates. And if we can make a little money for a short period of time, why not? Thanks so much for the email. I appreciate it.
From Jerry: Rick, what are your thoughts on using a bank as a trustee for my trust?
Well, Jerry, on the whole, I'm not a big fan of using banks as trustees. And my reasoning is, is so much that happens in a trust deals with someone who knows you and you want someone as your trustee that's going to do what you would have done based upon the facts of the time. And you can't get that with banks. So generally, I like, and I prefer using family members. I think family members know your situation and they'll do what you want them to do. Now, they may not have some of the technical capabilities to handle running the trust. Well, my philosophy, they could hire someone that they can fire. When you name as bank as a trustee, it's very difficult to fire them. But if you name a family member as a trustee and they hire the bank to assist them, they could fire the bank in any given time. I find that sometimes where I do recommend a bank is where I know there's going to be problems within the family, families don't get along, where there's going to be fights and I need an impartial arbitrator. In those situations, I would use a bank. Now I would tell you, Jerry, it's important to shop that around as well.You should find out what the costs are because costs are important. And you should find out how they're going to manage your trust. You just shouldn't use your local bank, talk to a few trustees and you now have trust services through companies like Fidelity and Schwab. So, using a professional trustee to me is the second alternative. I first want to use a family member and then I want to bring in a professional. And at the same time, there is nothing wrong with having joint trustees. You can have a professional trustee and a layman act as trustees; you can do all sorts of things.
One last note in that regard, if you are doing a trust, I do recommend that you have an attorney, an estate planning attorney draft the trust. Trusts are much more difficult than wills. Lots of I's and T's that have to be dotted and crossed and having a good estate planning attorney will save you lots of aggravation in the future.
Well, our time is just about up for today. I want to thank you so much for the company. I enjoyed it. Hope you did too.
I want to remind you if you have questions that you want me to answer, Rick@rickbloomtalksmoney.com. Also, any comments, constructive criticisms on the podcast. Also, if you have any guests you want me to get, I'm all ears. Remember this podcast is dedicated to you and our sole goal is to make sure you have more money in your pocket, because I believe money looks better in your pocket than it does anywhere else.
Have a great week. Thanks so much for joining me. Bye now.
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