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Financial Literacy Friday: Recessions

Welcome to another week of Financial Literacy Friday, and to piggyback on last week’s post about market corrections, we’re looking at recessions.  Unlike market corrections which are short lived and have the ability to be positive, recessions are extended periods in economic decline. Most of us remember the recession that occured from 2007-2009 and the sharp decline in economic strength that it brought upon us.  Given that our country experienced such a sharp decline only recently, let’s take a look at what a recession actually is as well as try to put it into an historical context.

What is a Recession?

As I mentioned, recessions are longer term downturns in the economy that can last for a few years.  This can be evident in employment, industrial production, and income as well as a few other factors can all suffer during a recession.  However, a recession is simply defined as two consecutive quarters with negative economic growth as determined by the GDP of the country.  These are different beasts than market corrections because they bring a sustained economic decline which can affect many different facets of the economy.  Recessions can sometimes also be brought on by specific events, such as in late 2007 when the housing bubble burst. This led to sharp drops in other sectors and shed a very bright light on the risky investment strategies that many of the world’s financial institutions were using.  So now that we have a bit more understanding of what a recession is, let’s put these events into an historical context.

History of Recessions

With the recession of 2007-2009 still fresh in our minds, it can be difficult to normalize these kind of events.  However, recessions are a normal part of the business cycle and there have been 33 of them throughout the history of the United States.  The recession that occured before 2007 was in 2001 with the dot.com bust that spelled the end of many high tech companies. Because these events are a normal part of the business cycle, it’s worth taking some time to think about how best to deal with them when they come and how that could change your investment attitudes.  As I’ve mentioned before, there were a lot of people (myself included) that lost significant portions of money in the last recession, but the people that stayed invested through it and believed in their strategies were able to regain their lost wealth and substantially grow after the recession ended. The point is that while these events are scary and stressful, it can be useful to see them for what they are.  They’re normal downturns in the economy that have happened before and will happen again. If you are able to keep your head during the downturn and stick with it, the chances are good you’ll come out the other side and be made whole again.

How did the recession in 2007 make you feel?  Did it change the way you viewed investing? I’m very curious to hear the impact that these events have on the general public, so please email me if you’re willing to share your experience.

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