Navigating Business Cycles: Key Insights for Financial Planning
About the Guest(s):
Amy Irvine
Amy Irvine is the CEO and founder of Rooted Planning Group, a firm dedicated to providing personalized financial planning advice. With years of experience in the financial industry, Amy has established herself as an expert in guiding individuals and businesses through complex financial landscapes. Her work focuses on practical and sustainable financial strategies, emphasizing the long-term growth potential of her clients' financial futures. Amy is a sought-after speaker and educator in financial planning, known for her approachable and educational insights into personal finance and economic cycles.
Episode Summary:
Dive deep into the intricate world of financial planning in this compelling episode of Money Roots. Join host Amy Irvine as she unveils the often-overlooked importance of business cycles and their influence on personal finance strategies. With economic uncertainty looming, now is the perfect time for a refresher on the fundamentals that underpin our financial decisions. Amy shares her expert insights on how to navigate market fluctuations and make informed choices, whether you're an investment novice or a seasoned financial planner.
This episode begins by defining the business cycle and its phases—expansion, peak, contraction, and trough—and how these stages relate to economic indicators like GDP and unemployment. Amy emphasizes the challenges of timing these cycles, comparing them to market cycles, which often react prematurely based on investor sentiment and other factors. The episode masterfully utilizes SEO keywords such as "financial planning," "business cycles," "economic indicators," and "market cycles" to provide a wealth of knowledge and practical advice for maintaining financial stability through economic highs and lows.
As the discussion progresses, Amy provides a comprehensive guide on maintaining a robust financial plan amidst market volatility. Key strategies include maintaining a long-term perspective, regular portfolio rebalancing, adjusting expectations based on economic phases, and building an emergency fund. Amy underscores these points with impactful quotes about the inevitability of economic downturns and the advantages of well-constructed portfolios. This episode serves as an indispensable resource for anyone looking to enhance their financial literacy and secure their financial future in uncertain times.
Key Takeaways:
- Understanding Business Cycles: Learn about the four phases of the business cycle—expansion, peak, contraction, and trough—and how they affect economic conditions and financial planning.
- Distinguishing Business and Market Cycles: Understand the key differences between business cycles and market cycles, including their frequency and volatility.
- Financial Planning Strategies: Discover practical tips for maintaining financial stability, like portfolio rebalancing and having an emergency fund.
- Long-term Perspective: Emphasize the importance of focusing on long-term financial goals rather than reacting to short-term market movements.
- Portfolio Resiliency: Appreciate the benefits of diversifying portfolios to withstand different economic conditions while avoiding excessive risk.
Notable Quotes:
- "Recognizing this distinction allows us to focus on the aspects of our financial lives where our decisions truly matter."
- "Trying to be precise about timing the business cycle is just very challenging."
- "Short-term market movements often appear as mere blips when viewed over decades."
- "Financial plans should take into account the fact that downturns are absolutely going to happen."
- "Market and business cycles are a natural part of investing experience."
Resources:
- Rooted Planning Group: Website (URL not explicitly mentioned in the transcript)
Embark on this enlightening episode to gain a comprehensive understanding of how economic trends impact your financial journey. Listen, learn, and prepare to thrive in both stable and uncertain economic times. Don't forget to subscribe to Money Roots for more insightful discussions on personal finance.
Transcript
Welcome to Money Roots, the podcast where personal finance gets personal.
Speaker A:Each week, Amy and her guests dig deep into the world of finance, making it more approachable and understandable for everyone.
Speaker A:No matter where you are on your financial journey, from savings and investments to budgeting and planning, we'll bring you practical advice, inspiring stories, and expert insights.
Speaker A:We believe that everyone has the potential to grow a healthy financial future, and we're here to help you nurture it.
Speaker A:So whether you're a financial guru or just starting to plant the seeds of your financial knowledge, this is the place for you.
Speaker A:Get ready to uncover the tools and strategies that can help you thrive financially.
Speaker A:So, without further ado, let's dive into today's episode of Money Roots.
Speaker B:Hello everyone, this is Amy Irvine, CEO and founder of Rooted Planning Group.
Speaker B:Today's discussion is going to be on something that I think a lot of people need some more education, and that's the importance of business cycles and financial planning.
Speaker B:When it comes to financial planning, it's really important to recognize that we can and can't control certain aspects of things, right?
Speaker B:We can control our own behavior.
Speaker B:We can make thoughtful financial plans.
Speaker B:We can adjust our strategies as they are needed.
Speaker B:However, what we can't control is the economic cycles, market movements, or policy decisions that impact the broader financial landscape.
Speaker B:Recognizing this distinction allows us to focus on the aspects of our financial lives where our decisions truly matter.
Speaker B:With some investors now worried about a possible recession and the stock market facing heightened uncertainty, we believe it's a good time to review the fundamentals of business cycles and certainly how they affect the financial planning world.
Speaker B:So let me start with what is a business cycle?
Speaker B:So, business cycle represents the broader economy movement from periods of growth and recession measured by metrics like the gdp, unemployment or employment, industrial production, those kinds of things.
Speaker B:While the duration of a business cycle can vary significantly, they tend to be over long periods of time, like five to ten years on average.
Speaker B:According to the National Bureau of Economic Research, there have been 12 recessions since World War II.
Speaker B: we have experienced three the: Speaker B:Of course, there have been many more cases when investors and economists feared there might be a recession.
Speaker B: stagflationary period of the: Speaker B: he steady growth period until: Speaker B:Phases of the business cycle are unique.
Speaker B:There are patterns that have emerged over time.
Speaker B:And general business signals can be characterized by phase four distinctive phrases.
Speaker B:Expansion, which is during this phase the economy grows, unemployment falls, consumer confidence rises and business activity increases.
Speaker B:GDP growth is positive and companies often invest in new capacity.
Speaker B:Peak is the point where growth reaches its maximum.
Speaker B:The economy is operating at or near full capacity.
Speaker B:Inflation may begin to rise and signs of overheating may appear.
Speaker B:Contraction.
Speaker B:During this phase, the economic activity actually slows.
Speaker B:Companies may reduce hiring or lay off employees and GDP growth slows or becomes negative.
Speaker B:Consumer spending typically decreases during this phase.
Speaker B:And then you have the trough.
Speaker B:This is the lowest point of the cycle where economic decline bottoms out before beginning to recover.
Speaker B:Unemployment is typically at the highest and business confidence is usually really low.
Speaker B:So you think of it as kind of this roller coaster.
Speaker B:Now if you were to plot it from, you know, point A to point Z, I guess you want to say, yeah, sure, there's usually a straight line of growth.
Speaker B:But it's during these periods of time that concern rises.
Speaker B:Each phase may not equal in length, so each phase may not equal in length.
Speaker B:I just want to repeat that because I think it's important that people understand it.
Speaker B:So each phase may not be equal in length.
Speaker B:And there are both situations where business cycles last longer and some than some expect in cases where cycles end just like that.
Speaker B: For example, during the: Speaker B: In about: Speaker B: In contrast, in: Speaker B: The same is true of: Speaker B:Trying to be precise about timing the business cycle is just very challenging.
Speaker B:This is one of the reasons economists or economics is often referred to as a dismal science.
Speaker B:I thought that was funny when I read that the other day.
Speaker B:It has a poor track record of predicting recessions and often predicts ones that never occur.
Speaker B:However, recognizing where we generally are in these cycles can help us make better financial decisions.
Speaker B:Nonetheless.
Speaker B:Now, distinguishing between business and market cycles, this is something you've heard me talk about before.
Speaker B:Sometimes they're in the same sequence and sometimes they're not.
Speaker B:So distinguishing between business and market cycles, market cycles can be more volatile and occur more frequently than Business cycles.
Speaker B:Okay, so I'm going to repeat that.
Speaker B:Market cycles can be more volatile and occur more frequently than business cycles.
Speaker B:The stock market can experience multiple corrections within a single business cycle, including several short term pullbacks each year due to investor sentiment, liquidity, liquidity conditions and other factors beyond the economy.
Speaker B:This is because the market is anticipating the future while economic data is backward looking.
Speaker B:Markets are currently influenced by economic economic data, no doubt.
Speaker B:But news headlines, sentiment and many other data points are also taken into consideration by investors.
Speaker B:This means that markets can often overreact in short term events.
Speaker B:Now let's talk about financial planning through these cycles.
Speaker B:So rather than attempting to time the market, the following approaches can help.
Speaker B:The key is to ensure you stay on track with your financial goals throughout business cycles and market cycles.
Speaker B:So maintain a long term perspective.
Speaker B:Short term market movements often appear as mere blips when view, you know, when the views happen.
Speaker B:So they're just, they're a feeling of insecurity.
Speaker B:I think that's what we're going through right now, this feeling of insecurity.
Speaker B:So there are short term blips.
Speaker B:When viewed over decades, they can sometimes be inaccurate indicators of business cycles.
Speaker B: For example, the: Speaker B:In fact, our economy was too heated.
Speaker B:Right.
Speaker B:We had to slow down the economy and the stock market got worried that the Fed was going to increase interest rates too much.
Speaker B: the stock market predicted in: Speaker B:Another key thing that you can do to stay on track is portfolio rebalancing.
Speaker B:Regular portfolio rebalancing enforces the discipline to buy low and sell high by reducing positions that have appreciated and adding to those that have underperformed.
Speaker B:We, you know, I think people get nervous when markets have these short term corrections.
Speaker B:They sell out thinking, well, I'm going to wait until I feel a little bit better.
Speaker B:Well, by the time they feel a little bit better, often you know that they've missed the major part of the recovery.
Speaker B:So when appropriate, this systematic approach can help navigate market cycles within, you know, succumbing to the emotional decision, are you within your reasonable rate of, you know, change.
Speaker B: xample, if you're targeting a: Speaker B:Right.
Speaker B:So you may allow the portfolio to get up to as much as 65% equities or as low as 55% equities before you actually rebalance.
Speaker B:But do it based on whatever the range of tolerances that you feel comfortable.
Speaker B:Another I guess you want to say action that you can take, something that you can actually control or a way to stay on track would be to adjust your expectations by cycle phrases.
Speaker B:Phases.
Speaker B:Excuse me?
Speaker B:During late cycle periods when valuations are stretched, future returns may be lower.
Speaker B:Consider moderating return expectations during these phases rather than chasing that higher yield through excessive risk taking.
Speaker B:And you've heard me say this many, many times.
Speaker B:Another many, many, many times.
Speaker B:Another way that you can sort of wait out these cycles is to have an emergency fund.
Speaker B:Financial plans should take into account the fact that downturns are absolutely going to happen.
Speaker B:They're, they're inevitable.
Speaker B:Emergency funds cover six to 12 months of expenses, provide critical flexibility during those contradictory job security becomes a concern.
Speaker B:Portfolio resiliency across all phases of business cycle is something that we should be talking about.
Speaker B:Construction on appropriate portfolios remains the cornerstone of investing across business cycles.
Speaker B:Different asset classes can respond in unique ways to changing economic conditions.
Speaker B:For example, stocks typically benefit from economic expansions but struggle during contraction.
Speaker B:In contrast, bonds can generate income during expansion and provide portfolio balance during contractions.
Speaker B:The right portfolio differs for each person.
Speaker B:Balancing these asset classes are according to your time horizon, risk tolerance, and financial goals.
Speaker B:And that's why we always say a well diversified portfolio might under might underperform the hottest asset class losses during any given cycle.
Speaker B:But it also avoids the most severe downturns that can derail financial plans.
Speaker B:Of course, you know, we could never guarantee any of that, but that's typically what's been what's happened in the past.
Speaker B:The bottom line.
Speaker B:Market and business cycles are a natural part of investing experience.
Speaker B:Rather than trying to predict each turning point, history shows that it's better to maintain a well constructed portfolio then you know, then try to pull out at different timings.
Speaker B:These portfolios have historically weathered all parts of the cycles.
Speaker B:It's something that you have to feel comfortable with, but that is our recommendation.
Speaker B:We hope that you found this podcast helpful in explaining what's going on, explaining differences in market cycles, economic cycles, the differences between the two.
Speaker B:As always, if you have any questions, please feel free to reach out to us.
Speaker B:We'd love to educate and to share additional knowledge knowledge with you.
Speaker B:Thanks everyone.
Speaker A:You've been listening to Money Roots, your go to podcast for making personal finance accessible and approachable.
Speaker A:Thanks for joining us today.
Speaker A:Amy and her guests have enjoyed guiding you through the roots of your financial journey.
Speaker A:Remember, whether you're planting new seeds of financial knowledge or nurturing the growth of your existing financial plans, Money Roots is here to support support you every step of the way.
Speaker A:Be sure to follow them on Facebook, X, LinkedIn and Instagram for more resources.
Speaker A:And of course, subscribe to Money Roots wherever you get your podcasts so you never miss an episode.
Speaker A:A big thank you to the sponsor, Rooted Planning Group, for making this show possible.
Speaker A:At Rooted Planning Group, they're committed to helping you cultivate a thriving financial future.
Speaker A:Until until next time, keep growing your Money Roots.
