I have a feeling that the financial media really likes recessions. I’m willing to bet if you look at annual ratings for channels like CNBC, they had their best years during recession. Why do I think this? Because the financial media plays off of the same emotions that dictate average investors terrible performance: greed versus fear.

Fear is when these media outlets really make their money because people want answers. They want to know why the market is going down, how much they are going to lose and what exactly they should do. They want the comfort that someone has the answers. However, if you are one of these people doing this during a downturn in the stock market, it’s already too late. You don’t know enough of the basics of investing to know to turn the garbage financial media off and go about your day knowing you have stick to the fundamentals.

Before that happens though, hopefully you take a look at blogs or non sensationalist financial sites like this one to get your feet on firm ground before the bottom falls out of the market. In order to get you acquainted with with what to do, it helps to know where things are going right now. After that, I will discuss how your savings should be broken down so that you can be well prepared for the stock market gyrations.

The Current State of the US and Global Economy

Around this time last year, the market was starting to wobble and investors ran for the hills. It culminated in a steep sell off in December that saw the S&P 500 check the bear market box of a 20% or more drop.

Source: Federal Reserve

At that time though, there was talk of recession but many of the fundamentals were still strong: consumer sentiment was high, industrial production was still climbing and GDP growth was positive. It seemed like one of those self fulfilling prophecies where because investors thought there would be a downturn they wanted to sell and get out first, that prompted others to sell, which prompted even more to sell and so on and so forth until you have a correction.

This time may be different. At that time last year the Fed had still been raising rates, the yield curve was upward sloping and other large economies were not showing signs of an imminent slowdown. When we look to the current situation we have:

• The yield curve predicting an 80% chance of recession within the next 17 months.

Source: Rabobank

• German industrial production, the heart of Europe’s exporting machine, slumping.

Source: Bloomberg

• Outflows of money from equity funds and into cash for institutional investors.

Source: Lipper

To add to all this, interest rates across the rich world falling both in terms of bond yields and the policy rates of the major central banks.

Source: Rabobank

What these signs point to is more than just bearish stock market investors. Institutional equity investors, policy makers and bond investors all see a heightened risk of a slowdown within the next year and are preparing their money for it.

The Trade War Won’t Go Away

Although we have had 10 years of gains in the stock market and GDP growth, the party had to end some time. We may not be in this bad of shape going in though if we didn’t have the added gasoline of the trade war. The trade war between the US and China is not only hurting Chinese and American exporters, it is having spillover effects to other economies and seems to be dragging down global trade overall.

Source: Rabobank

Emerging Asia trade has seen trade sink as supply chains have to eat the tariffs. Factories and companies cannot quickly pick up sticks and leave to a cheaper country that doesn’t have tariffs, these are long term decisions that are planned years ahead of time.

In fact, world GDP growth is being almost entirely powered at this point by Asia, mainly China and India. The EU and the US, the other sources of global growth, are stalling while other markets are not yet large enough to have an impact.

How to Protect Your Money

So given that all this is going on, it’s surprising that we still have not seen a correction come in the stock market like we did last year. That’s not to say one is coming soon. Anyone that tells you they know what the market is going to do next is a liar. The fact is, no one knows and that uncertainty is what gives the market one of the best returns over the long term: you get paid for the risk of not knowing what is going to happen tomorrow, but only if you stick with it.

As discussed in previous posts, if you have saved something, it should be divided up based on your needs. For example, here is a basic outline of how I divide my savings based on when I need it:

• 3 to 6 months: CDs or money market funds which can offer some small return. At least 3 months of expenses I will keep in cash while another 3 months I will have in money market funds.
• 6 to 12 months: Short term bond funds. These are usually treasury funds with maturities less than a year that can yield you something.
• 1 to 4 years: for this time period I put my money into bond funds. Either treasuries for the shorter terms of 1-2 years or corporate and long term bonds for 2-4 years. I may also allocate some funds at the 3-4 year mark for a conservative growth fund from Vanguard which is 60/40 bonds to equity.

Source: Vanguard

• 5 years or more: I either do a mixed fund like the life strategy funds offered by Vanguard or I will go all equity. If I go all equity, these are long term funds I don’t intend to touch for likely more than 5 years. They will usually be in broad Vanguard ETFs so as to have diversification and low costs.

This 5 years or more allocation is where the majority of your equity should be. I invest in equity with the knowledge that it could drop by 20% or even 40% by tomorrow but since these are long term investments, I don’t let it bother me. In fact, a drop like that means I would likely put in more money given my investment horizon is over many years.

So the simple answer on how to protect your money is: nothing. Do nothing, because you should already have a strategy for your savings that includes the short term up to the long term. That long term is likely the portion invested in equities so you shouldn’t worry about what that portion is doing day to day. Actually, you will likely do better if you don‘t know what it is doing day to day.

To showcase my point, Fidelity did a study a number of years ago to find out which client accounts performed the best. What did they find? That those who forgot that they had accounts at Fidelity performed the best of all investors. The best investors were those that let their money sit in equity funds which they had completely forgotten about and didn’t think of at all, letting it grow and compound over many years.

It goes to show why the average investor does so poorly. Over a 20 year period from 1993 to 2013, the average investor saw a return of just over 2%. This is a terrible performance given all of the growth that the market saw over that period.

Source: Business Insider

So the best advice in this case is that as long as you have done the work of segregating your investments by your needs, you don’t need to pay attention to the market. In terms of your long term investments, you shouldn’t even touch your money.

The “just let it alone” mantra is also the reason that I hold a target date fund as my main 401k investment. These are usually the funds that are the default investment option in most people’s 401k accounts so some other finance workers are perplexed when I say I invest in the target date fund. My logic is simple though: I don’t trust myself to just follow the boring rules, so I have someone automatically adjust for me. It’s the same thought process as leaving it alone.

Target date funds automatically get more conservative and shift from mostly equity to a mix of equity and bonds as you move towards retirement. The gradual conservative movement of the portfolio as you move closer to retirement is call the “glide path” and can be seen below.

Source: Vanguard

Where the red is domestic equity and the yellow is international equity. Starting at age 40 the blue of the bonds starts to increase as more of your retirement assets are shifted to bonds.

Conclusion

So even someone who knows what they are doing (mostly) just keeps their portfolio in the boring, easy option that many of you have already. The real work comes in the discipline of saving and investing consistently. So do yourself a favor if you want to achieve success in investing, turn off the TV, throw your money in boring funds and get back to work.

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