The Importance of an Advisor During a Recession
By Brandon Clark, CPA
Recessions and market downturns are unsettling – the news is scary, and uncertainty is everywhere. This is when having experienced and knowledgeable people you can turn to for advice really pays off. Your financial advisor can be a valuable guide through the challenges of a recession because they are experts on your situation, and understand how to manage difficult economic cycles. One of the biggest problems with a market downturn is how scary it is to watch your accounts go down in value. A good advisor can help you stay focused on your long-term goals, and reframe these losses in context of normal economic cycles. After all, you don’t run away when you see a pair of shoes on sale! Investments are no different.
How much cash is ideal for an emergency fund?
During a recession, when some people lose their jobs, it becomes very clear how important a strong emergency cash fund is. For most people, we look at 3-6 months of their normal expenses being a good target to have in cash at all times. For business owners we may look at larger amounts, depending on their business type, and whether revenues could decline in a downturn. A financial advisor can help you figure out exactly how much your monthly expenses are for calculating your emergency fund, and take into account how much your income could be impacted in a recession.
Put your excess cash to work
If you’re investing for the long-term, a recession is a great time to add money because investment values have declined – again, they are on sale! An advisor can help you figure out the right balance of cash and investments, and which types of assets to invest in. Think of “invested reserves”- non-retirement accounts – as a way for any excess cash to start working towards your long-term goals.
Advisors can work with your tax advisor to improve your tax strategy
Recessions are ideal times to make sure you have the smartest long-term plan for managing your taxes. You may have choices related to your retirement plans or compensation structure that can make a big difference over your lifetime. Working with a tax savvy advisor along with your accountant can save you taxes now and in the future. For some clients, Roth conversions and tax efficient invested reserves are important aspects of their strategy. These are a few of the ways that our firm works with our clients and their accountants to be smart about taxes.
Frequently Asked Questions About Recessions and Financial Planning
What should I do financially during a recession?
During a recession, it’s important to stay focused on long-term financial goals, maintain an emergency fund, avoid emotional investment decisions, and review your financial plan with a trusted advisor.
Should I sell my investments during a market downturn?
In many cases, long-term investors are better served by staying invested rather than reacting emotionally to short-term market declines. Market downturns are a normal part of economic cycles, and selling during periods of fear can lock in losses.
Is a recession a good time to invest?
For long-term investors, recessions can create opportunities to buy investments at lower prices. Market downturns often allow investors to purchase stocks and other assets “on sale” compared to prior valuations.
How much cash should I keep in an emergency fund?
Many financial professionals recommend keeping 3–6 months of living expenses in an emergency fund. Business owners or individuals with variable income may need larger cash reserves depending on their financial situation.
Why is an emergency fund important during a recession?
An emergency fund can help cover essential expenses if you experience job loss, reduced income, unexpected medical costs, or business disruptions during an economic downturn.
Should business owners keep larger emergency savings?
Yes. Business owners may need larger emergency reserves because recessions can reduce revenue, disrupt cash flow, or create periods of financial uncertainty for their companies.
What are invested reserves?
Invested reserves are non-retirement investment accounts that allow excess cash to grow toward long-term financial goals while remaining more accessible than retirement accounts.
How can a financial advisor help during a recession?
A financial advisor can help manage emotional decision-making, review cash flow and emergency savings, adjust investment strategies, coordinate tax planning, and keep financial goals aligned during uncertain markets.
What is a Roth conversion and why does it matter during a recession?
A Roth conversion moves money from a traditional retirement account into a Roth account, potentially allowing future tax-free growth. Lower account values during recessions can sometimes make Roth conversions more tax-efficient.
How can recessions create tax planning opportunities?
Recessions may create opportunities for Roth conversions, tax-loss harvesting, retirement contribution adjustments, and more efficient long-term tax strategies coordinated between financial advisors and accountants.
Should I keep extra cash or invest during a recession?
The right balance depends on your emergency fund needs, income stability, financial goals, and risk tolerance. A financial advisor can help determine how much cash to keep available and how much to invest for long-term growth.
Why do recessions feel so stressful for investors?
Market downturns often trigger fear and uncertainty because investment account balances decline and negative financial news becomes more visible. Emotional reactions during recessions are common and normal.
How do long-term investors handle recessions?
Long-term investors often focus on maintaining diversified portfolios, continuing consistent investing, avoiding panic selling, and viewing recessions as part of normal market cycles.
Can financial advisors work with accountants on tax strategy?
Yes. Financial advisors often collaborate with accountants and tax professionals to help clients create more efficient long-term tax plans, especially during periods of market volatility.
What financial mistakes should I avoid during a recession?
Common mistakes include panic selling investments, carrying inadequate emergency savings, taking on high-interest debt, stopping retirement contributions entirely, and making emotional financial decisions based on fear.
