If recent market tumult, geopolitical instability, and rising inflation have caused you to take another look at your finances, then you’re far from alone. Experts are predicting that the current downturn may just be the tip of the iceberg. According to Bloomberg, the likelihood of another recession occurring before the end of 2022 has increased to 30% from the 27.5% likelihood that was predicted in April 2022.
Symptoms such as the negative economic growth rate in Q1, supply chain disruptions brought on by the war in Ukraine and China’s zero-COVID tolerance policy, and recent interest rate hikes by the U.S. Federal Reserve have led economists to believe that a recession is looming. Although no one can fully predict how steep of a decline we could face, investors can take steps today to ensure that their finances are protected from whatever comes next.
As you reevaluate your financial plans, consider implementing these six steps to prepare yourself for an impending recession.
1. Maintain a cash reserve and don’t tap into your retirement
There may be times during a recession when you’re tempted to sell off assets because you need liquidity to cover expenses or simply because you have cold feet but doing so will negatively impact your retirement plans and diminish the strength of your overall portfolio over the long-haul. Always keep in mind that recessions–though they’re daunting and have the potential to span months, or years–are only temporary phases of the normal economic cycle. Take a step back and understand how economic cycles work, while historical performance is no indication of future performance, it’s important to keep an eye on the broader picture and remember why you are investing for the future.
Instead of selling off your financial assets, assess your emergency fund and consider rebuilding it until you’ve amassed up to 6-12 months of expenses covered. If you are a little shy of the recommended benchmarks, look at your current spending and consider trimming costs where possible so that you can redirect that cash to your emergency fund. Having the cash reserves will go a long way towards providing you security in the event of job loss or other unforeseen events that could occur during a recession.
2. Reevaluate certain spending habits
In a recent interview with Banfield, HerMoney’s Kathryn Tuggle provided insight into how Americans of all types can begin preparing for an economic downturn. Her advice? Focus on paying off debt and take a closer look at your spending habits, as these are the simplest–but potentially most impactful–steps you can take to lower expenses and save money. Taking small steps like canceling the rarely used online subscriptions or gradually paying down the balance of your high interest-bearing debt will be hugely beneficial to your financial wellness during periods of economic recession.
Consider transferring the credit card balance to an introductory zero-interest rate credit card and be intentional about paying off the entire balance during that promotional period. With this strategy, every payment you make will go 100% towards principal and position you on the fast track of wiping that debt off your books before the recession is in full swing so that you can avoid having to make burdensome interest payments.
Other debts with lower interest rates, may not make as much sense to pay down in the midst of a recession. Based on your individual financial circumstances, this money could potentially be used for something else, such as solidifying your emergency fund or investing in defensive assets.
3. Look for safe-haven assets
“Safe-haven assets” have long served the purpose of lowering the overall risk profile of your portfolio, as explained by Fortune. Series I Savings Bonds (or I bonds), in particular, present a unique opportunity for investors to shelter their funds from the corrosive effects of inflation.
4. Diversify your equity exposure
The most common piece of investing advice looms even larger with a recession on the horizon. According to CNBC, diversifying your holdings with a mix of growth stocks and value stocks—those trading for less than their intrinsic worth—can help your portfolio achieve a smoother ride amidst turbulent market conditions. Value stocks, though they may not promise the same high returns as growth stocks during bull markets, tend to outperform growth stocks during recessionary periods. Their steadier performance will help make up for any losses incurred by the more variable growth stocks.
5. Utilize dollar-cost averaging
Regardless of your comfort level when it comes to investing, experts suggest an investing method that can benefit almost any portfolio, and it’s called dollar-cost averaging. This method is popular among investors because it’s simple and it removes the guesswork from investing, making it even more appealing during times of fluctuation or unpredictability in the markets. The broad, unemotional, and unbiased perspective it provides should help you rest easier as the recession moves along.
Here’s how dollar-cost averaging works. In the simplest terms, you will invest the same amount of money at the same time each period, regardless of what’s going on in the market. Depending on the price of the asset at the time of purchase, your contribution will either buy you a higher number of shares or a fewer number shares. Over an extended period of time, you will average the prices you paid for the asset in order to arrive at a dollar-cost average over that period.
Let’s say, for example, that you invest $1,000 in the same asset at the same time each month. Last month, the price of the asset was $50, so you acquired 20 shares. This month, the price of the same asset is $40, so you acquired 25 shares. That means that today you’ve got 45 shares with an average price of $44.44.
This strategy helps position investors to take advantage of a volatile and declining market in the interim while position them well for future gains as markets eventually turn the corner.
6. Don’t become overwhelmed
Remember that recessions are part of the normal cycle of any economy, and we have weathered some significant ones in recent decades. Not every recession degenerates into complete upheaval, as we experienced during the lowest point of the pandemic and during the Great Recession of December, 2007 – June, 2009. It’s important not to become anxious when things begin to turn and instead lean on the perspective that we’ve gained from past periods of economic downturn. Just as with the other stages of the economic cycle, the equity markets will bounce back, it’s just the price that we pay as investors for future long-term growth.
Now is a great time to speak with an expert about the opportunities that are available to you to bolster your portfolio and position your finances to weather the worst of an impending recession. Reach out today for a complimentary consultation with one of our licensed financial advisors to learn more.
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