When I graduated from college back in 2009, the country was in the midst of the biggest recession since the Great Depression. During that two or three year span, the market lost nearly 50% of its value, and it didn’t fully recover until well after 2009.
Luckily for me, I was a broke college student back when the market tanked, and as a result, I didn’t really feel any immediate monetary impact from the Great Recession. While the entire world was freaking out, I was honestly pretty oblivious to what was going on around me – I was insulated from the recession by being in college and because I had no money, I didn’t know that the stock market was in a freefall.
It wasn’t until I graduated from college in the spring of 2009 that I realized something was up. I couldn’t get a real job, none of my friends could get a real job, and we all ended up having to move back home, working at restaurants to make some money and doing unpaid internships to build up our resumes. Even then, I didn’t really know what was going on with the stock market. I only knew that the economy was bad.
The point of this is to demonstrate the important fact that when the next downturn comes, what’ll really matter for most of us isn’t the value of our investment portfolios. Unless we’re using our investment portfolio as our income source, market movements are basically meaningless.
If you had asked me what was going on with the stock market back in 2009, I honestly wouldn’t have been able to tell you. From a practical standpoint, the stock market didn’t matter. The only thing that really mattered to me was getting a job. When the next downturn happens, that’s probably the only thing that will matter to you too.
Stock Market Movement Doesn’t Matter When You’re Young
We’ve now been in a bull market for the better part of 9 years – one of the longest bull markets in recent memory. But things are starting to get a little choppy.
Early in the year, people freaked out when the market took a bit of a dip (only to come roaring back a few months later). Now, the market is starting to do it again, leading to tons of sensationalist headlines about how all of the gains for 2018 have been “wiped out.” If things keep going south, you’ll start hearing from a lot of people how about much money they’ve “lost” over the past few weeks.
But remember, the money you have invested in your retirement accounts or brokerage accounts is probably not money you’re planning to use anytime soon. Even someone with several hundred thousand dollars invested right now hasn’t really lost anything if the market tanks. It sucks to look at, for sure. But investments aren’t really “real” until you actually have to use the money. Until then, it’s just in your head.
In short, if you’re still many years away from actually needing to use your investments as income, whatever the market is doing right now doesn’t matter. That’s going to apply to most people in their 20s and 30s. Things can go up, things can go down, and really, it’s all just imaginary. So why worry about it?
Instead, spend your energy worrying about more important things.
What Matters In A Downturn Is A Job Loss
Ultimately, for those of us in the beginning and middle stages of our paths towards financial independence, what really matters isn’t what the market is doing now. Our path towards financial independence doesn’t come from what our investments are worth right now. It comes from our active income – the income that we earn from working.
That’s why during a market downturn, the only thing that really matters for most of us is whether or not we keep our jobs. What hurt a lot of people during the last financial crisis wasn’t the market crash. It was the job loss that resulted from it as companies started to lay off employees. Once that happened, people had to dig into savings, and when that ran out, they had to dig into their investments. The combination of having no money coming in, plus having to dig into money from an already depleted portfolio is what caused the hurt.
My net worth can be cut in half today, and that wouldn’t be fun to look at. But it’s not my net worth that supports me right now. It’s my income from my job.
Take Steps To Hedge Against Job Loss
Since it’s the potential of a job loss that matters when the next downturn happens, we want to take as many steps as possible to address this problem.
Here are three ways to do that:
Keep An Emergency Fund. An emergency fund is the simplest hedge against job loss and is the primary reason why I support keeping a sizeable emergency fund as part of your financial plan. If you have several months of cash stashed away to cover your expenses, then a job loss really won’t be as big of a deal. You’ll also probably figure out how to live lean during times of unemployment, so if you think about it, your estimated expenses may actually be less than what you anticipate. Importantly (and to address the critics of keeping cash), your emergency fund doesn’t have to sit idle. You can put at least some of it into 5% interest savings accounts. Or use your emergency fund to earn bank bonuses. Your emergency fund can grow more than inflation if you know what you’re doing.
Create A “Side Hustle Emergency Fund.” One of the reasons I love the sharing and gig economy is that, in a way, it serves as a secondary emergency fund (or even a primary emergency fund). I know that I can make $1,000 or $2,000 in a month just by doing these different gigs, so if I lose my day job, I still have a way to bring in some income to support myself while I search for another job. The good thing about sharing economy and gig economy apps is that they aren’t things you have to do all the time. You can just sign up for them, leave them on your phone, and bust them out if/when they are needed. I suspect that when the next big downturn happens, a lot of people will turn towards gig economy apps to help keep themselves afloat. When that many people sign up, it can take months before these companies actually approve you to work. Those of us that already set up our “side hustle emergency fund” will already be ready to go.
Create A Business. Building some sort of business is something that I think everyone should do if they can. The great thing about having a business is that you can never get fired from it! And if you keep putting a bit of work into it, your business should grow each year, compounding on the work you’ve already done. I’ve been working on this blog for over 2 years now, and it’s continued to grow steadily each year. If a job loss happens, I know I can lean back on this and put even more work into it (and perhaps grow it more).
When the next downturn happens, your investments will tank. But if you’re like me and not actually using those investments to support your life, it really won’t matter. What will matter is when the next big market crash happens and we all get fired from our jobs.
Luckily, if you’re reading this, then you’ll already be ready for that.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the sharing economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the sharing economy and you can see all the ways he makes extra income every month in his side hustle reports. (If you want a quick side hustle win, check out Job Spotter)
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- Personal Capital. One of best apps to monitor your portfolio and track your net worth. Plus, it's free to use and you get $20 for creating an account.
- SoFi Money. A really good 2% interest checking account with absolutely no fees. Even better, you'll get $50 if you open an account and fund it with $100.
- Dobot. This is a great microsaving app that monitors the cashflow in your bank account and saves away small amounts for you each week. It's free and you'll get $5 when you use it.
Feel free to send Kevin a message here.
as an older person (50) the key to my wife and i getting to a position of financial independence was absolutely due to keeping both of our jobs during the last recession. we even bumped up our contributions as we knew we were buying shares at a generational low all the way down. it sucked for a lot of people but made out path much, much shorter.
we haven’t touched the e-fund in about 13 years since we funded it because of the same type of side hustle funds. mine was overtime money and mrs. smidlap’s was from art sales. it’s a belt + suspenders approach.
Always better to be more prepared! Very lawyer-like sounding of you with the belt and suspenders approach, haha.
I completely agree – the best possibility to FI is perhaps keeping ones job through a recession. It’d be quite something to max retirement accounts during downturns.
People who kept their jobs in 2009 are killing it today. Like I look at the lawyers who didn’t get fired back then and they should be killing it, especially if they started their careers in 2008 or 2009.
Man, graduating near the financial crisis or in the financial crisis must’ve been tough. I have never lost a job, although I came one month close before picking up a secret phone call and meeting with a new company in San Francisco when I was in New York City before getting let go.
Perhaps the upside of not having a job is not fearing a job anymore?
Now that I think about it, there were a lot of upsides of graduating in the financial crisis. Kept me humble – no big salary like these kids today and I had to move back home. Kept me scrappy – not afraid to do whatever I gots to do to pay the bills. A lot different graduating today then it was 10 years ago. Might be a post topic.
You should! As a recent grad in the past few years, I’d be very interested in that topic.
This is so true, it would definitely be beneficial for people to begin guarding against and preparing for the worst case should that happen. While I think my job would be fine during a recession, I’m also not naive enough to think I couldn’t lose my job. I’m pretty much planning to take all the steps you’ve listed, with the beefing up of my emergency fund and side hustling at the top of the list.
All about diversifying them sources of income!
Some great points here, especially setting up a ‘side hustle emergency fund’ – before you really need it. You’re so right that you would have a distinct advantage if you are already established with experience and good ratings before many others jump on board those gig services in a crisis. I would go further to say it’s worth experimenting with things like housesitting even in your own city, to get reviews in place and add this to your ‘portfolio’ of services you can utilize if needed to save money locally or traveling abroad.
This is a post I’m planning to write, but exactly. I have 137 Airbnb reviews, 51 Rover reviews, 170 Wag reviews, not to mention 600+ deliveries and lots of scooter charging experience under my belt. It took me three years to build this up, but now that I have this, it’s a nice backup and I’m ready to go when the worst happens.
I totally agree – the best possibility to FI is perhaps keeping ones job through a recession. It’d be quite something to max retirement accounts during downturns.
I’d think even more than all of that, what matters is not being employable!
Losing my job in a downturn was awesome! My employer gave me a severance package and I was re-employed in a month. Sure, I took a hit in my salary, but looking at some of my older colleagues who had not taken care of their marketable skills was devastating in comparison. Some with mortgages took over two years to re-employ.
Anyway, my point is, take care of your employability. Make sure everyone needs what you can do, and even losing your job won’t matter.
Good post, thank you. Fully agree, don’t stress over valuations. In a downturn, you get to shop on sale. I’m looking forward to it!
That’s pretty amazing that you got re-employed that fast. I know it wasn’t like that for a lot of people, but sounds like you had some definite skills that employers needed.