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.