Right now, the economy is in good shape. Stock markets have been at an all-time high, the unemployment rate is at a 10-year low and the Federal Reserve recently raised interest rates for the third time in a decade. Even if you’re feeling good about your finances, it’s still important to spend wisely, as markets tend to correct themselves.
“We’re about to be in our eighth year in a bull market — second largest bull market in the history of the world,” said entrepreneur, best-selling author, philanthropist and life and business strategist Tony Robbins in a recent interview with GOBankingRates. “There’s going to be a correction.”
Follow this advice from Robbins to start preparing for the next recession now so you don’t go broke in a downturn.
Don’t try to time the market
The stock market is extremely volatile, so even intense study can’t prepare you to know what’s around the next curve. Plus, in the moment, it’s hard to know how you’ll react to a major market shift.
“When the market is crashing through the floor, people will give you their house, they’ll give you their stocks for next to nothing. They just want out. Those are the greatest opportunities in your life,” Robbins said. “But if you’re going to try to time the market, you can forget it.”
“Warren Buffett told me, ‘Tony you know market timers and market forecasters, their only purpose is to make fortune tellers look good.’ It’s absurd,” he said. “Jack Bogle told me, ‘I’ve never met anybody and I’ve never met anybody who’s met anybody who’s accurately timed the market consistently.'”
Robbins acknowledged there are a few “unicorns,” such as Ray Dalio and Paul Tudor, who have consistently made money in good and bad markets. Despite that, he noted that these exceptional individuals have made so much money, their funds are now closed. Essentially, the chances you’ll strike it rich with market timing are so very small that it’s not worth rolling the dice.
Eliminate unnecessary expenses
The best way to win the financial game is to determine what you truly want, cut unnecessary expenses, set achievable goals and create a workable plan to get there, Robbins wrote in a post on his blog.
It’s tempting to spend your money at the hottest new restaurant in town or on a shiny new car, but that won’t help you prepare for the next recession. Making sacrifices is tough, but you’ll thank yourself down the road.
“Try not to think of it in terms of the purchases you’re not making today,” he wrote. “Focus instead on the returns you’ll reap tomorrow.”
It’s hard to curb your spending when you don’t really know where your money is going. Robbins suggested giving yourself a reality check by calculating the total of your recurring expenditures and deciding if the happiness they bring is better than the joy of financial freedom. Use this — and the amount of money you could be saving — as your motivator to reduce or completely eliminate unnecessary expenses.
Get a fiduciary
When working with a financial advisor, you want someone who always puts your interests first. However, Robbins advised that 90 percent of people in these roles are brokers, not fiduciaries.
“There’s nothing wrong with a broker,” Robbins said. “He’s a good person and might be sincere. But they work for the house and the house always wins.”
On the flip side, a fiduciary is legally required to disclose all conflicts of interest and must always offer advice in your best interest. They also monitor your personal situation to make sure your portfolio continues to align with your needs. The easiest way to tell if you’re working with a fiduciary is to find out if they’re a registered investment advisor.
Robbins also warned to watch for brokers who are also registered as fiduciaries. After learning about this phenomenon, he said he went through the list of people on his platform he was recommending and eliminated those who were “double dipping.”
“…They look you in the eye and say, ‘I’m a fiduciary and I’m not selling you anything I’m making money off of here. You’re just paying me a fee for my advice. I’m being transparent…,” he said. “In the middle of the conversation, they can switch hats without telling you and be a broker and sell you something that has the highest return for them or their firm makes the most money on. It’s absolutely insane.”
Stay tuned for new changes brought by the fiduciary rule. This rule went into effect on June 7, 2016, and is slated to be transitioned in from April 10, 2017, to Jan. 1, 2018. Under the terms, all financial professionals who deal with retirement plans or offer retirement advice will automatically become fiduciaries. However, in February, President Trump issued an order to halt the fiduciary rule, so it’s currently unknown if it will be implemented as scheduled or even at all.
Take advantage of compound interest
Using the power of compound interest can have a life-changing impact on your finances. “You have to move from just working for money to a world where money works for you,” Robbins wrote in his book, “Money Master the Game: 7 Simple Steps to Financial Freedom.” In that book, he used an example from “A Random Walk Down Wall Street” author Burton Malkiel to demonstrate the power of compound interest.
Twin brothers William and James started investing at different points in their lives. William opened his retirement account at age 20, invested $4,000 per year for the next 20 years, then stopped investing. He left his money in a tax-free account with an annual rate of 10 percent. James didn’t start saving for retirement until age 40, but when he did, he also put $4,000 per year into his account and continued until age 65.
James invested $100,000 over 25 years, compared with William’s $80,000 over 20 years. Despite this, William ended up with almost $2.5 million, while James had less than $400,000, all because of compound interest.
Saving even a small amount is better than nothing. Even if you don’t have much to put aside, save something, because compound interest will grow your modest sum into a nest egg — or “money machine” as Robbins said in his book — you can count on.
Making financial moves can be tricky. Robbins acknowledged that most people take a hands-off approach, preferring to turn their portfolio over to a professional.
“It’s great to get coaching from an expert, (but) you’ve got to understand the fundamentals,” Robbins said. His latest book Unshakeable can help you do that.
In this step-by-step playbook, Robbins offered the tools to achieve your financial goes, no matter what your current stage in life or how much you have in the bank. Co-authored by top financial advisor Peter Mallouk, Unshakeable explains how to weather economic volatility and even profit from it.
Being in-the-know can save you thousands. Robbins advised that even knowing how much you’re paying in fees will hugely impact your financial future. You don’t have to be an expert to make smart money moves. You owe it to yourself to be informed, ask questions and know exactly how your funds are allocated — and why those options were selected — at all times.
Invest on a set schedule
You can increase your gains in a fluctuating market if you invest a set amount of money on a regular schedule, in accordance with an asset allocation plan, Robbins wrote in Money Master the Game: 7 Simple Steps to Financial Freedom.
“If you have $1,000 to invest each month, and you have a 60 percent risk/growth and 40% security asset allocation, you’re going to put $600 in your risk/growth bucket and $400 in your security bucket regardless of what’s happened to prices,” he wrote.
Robbins said you can earn more by investing regularly in a volatile market than one with steady gains. He explained that you get more shares during times of turmoil when prices are cheaper.
He said Malkiel advised that most people are too scared to let the market work for them. Rather than selling shares in a panic, he advised weathering the storm.
“If you put all your money into the U.S. stock market at the beginning of 2000, you got killed. One dollar invested in the S&P 500 on Dec. 31, 1999 was worth 90 cents by the end of 2009,” he wrote in his book. “But according to Burt Malkiel, if you had spread out your investments through dollar-cost averaging during the same time period, you would have made money.”
The only time he doesn’t necessarily recommend the dollar-cost approach is if you’re investing a lump sum of money. In this case, you’ll need to examine your options to find the best fit.
Understand tax implications
When it comes to your investments, it’s important to determine the most tax efficient way to handle your money. “Without understanding the impact of taxes, true financial freedom is a pipe dream,” Robbins wrote on his blog.
Since you can only spend your after-tax income, he urged investors to factor the cost of taxes into their savings strategy. This will drastically alter the final balance in your account when you cash out, so completing this step is essential. In fact, it will be even more important to stay on top of taxes in the upcoming decades.
“With $16 trillion in debt and what some now estimate as nearly $100 trillion dollars in unfunded liabilities — Medicare, Social Security, etc. — do you think taxes will be higher or lower in the future? This one is not hard to guess,” Robbins wrote.
To drive his point home, he explained that a dollar that doubles every year for 20 years will amount to $1,048,576. However, if you assume capital gains are taxed at 33% each year, the ending balance is just $28,466.