A recession can be a scary and challenging time, especially for people who have their money invested in the market. The uncertainty and volatility of the market during a recession can make it difficult to protect your wealth. However, it’s important to remember that recessions are part of the economic cycle. They are bound to happen in our lifetimes. The best we can do is prepare for them, expect them to come, and stay the course in our investing strategies as best as possible.
In this article, we’ll cover various ways to protect your money in a recession. You may notice that many of the things you should do during a recession are not very different from the money management strategies you should incorporate on a regular basis.
Don’t “Panic Sell”
It’s easy to freak out if you see a lot of red arrows in your portfolio. However, it’s important not to react prematurely. Panic selling is when investors see the market starting to decline, get scared, and sell investments – usually at a loss. These investors hope to cut their losses before they lose more. However, what this does is locks in a loss and doesn’t allow an investor to benefit from a potential market recovery. It ultimately depends on what you’re invested in. However, if you are diversified in the overall stock market, it means that your portfolio may eventually see a recovery when the market itself recovers.
Diversify Your Portfolio
Diversification is an investment strategy that consists of investing in a variety of assets to minimize the risk in your investment portfolio. It’s the concept of “not putting all of your eggs in one basket.” If an asset or asset class isn’t performing well, the idea is that other assets (and asset classes) that you own will perform well and offset any losses. Examples of different asset classes include stocks, bonds, real estate and others. Diversification is a widely-accepted strategy to protect your overall portfolio in any market condition.
Rebalance Your Portfolio
Rebalancing your portfolio is strategically adjusting your investments to maintain your desired asset allocation. Depending on your risk tolerance and your investment strategy, you’ll have an ideal asset allocation. Since some asset classes might perform better than others during a recession, your portfolio can become unbalanced. If rebalancing your portfolio isn’t something you’re comfortable doing yourself, you may want to consider working with a financial planner.
Build and Maintain Your Emergency Fund
The idea of an emergency fund is that you’ll have cash to tap into in case of emergencies such as a loss of income, unexpected medical expenses, and other emergencies. The reason it’s especially critical to have an emergency cash reserve if you have money invested is that you don’t want to have to tap into your investments at inopportune times–such as when the market is down. Personal finance experts typically recommend 3-6 months worth of living expenses in your emergency fund, and keeping it in an FDIC-insured (or similarly insured) account.
Pay Down Debt & Avoid Taking on New Debt
Paying down debt is always a good idea regardless of what is happening in the economy. The less debt and interest you have to pay, the more cash flow you will have freed up for other financial needs. Unfortunately the chances of losing a job or source of income are higher during a recession, so freeing up cash flow is even more important for financial security. In addition, it’s important to avoid taking on new debts if possible. Try to only take on debt if you are certain you won’t have issues paying it back. Again, this is because there’s a higher chance of losing your income during a recession. It won’t happen to everyone, but it’s always good to be prepared.
Live Within Your Means
It goes without saying that living within your means is a critical personal finance skill to live by in any market condition. However, during a recession it’s even more important to maintain your good money habits and spend less than you make. Doing this allows you to use your surplus money towards your emergency savings fund, paying down debt, and other money habits that will help attain or maintain your financial security
Consider Professional Support
If you need help navigating your personal finances and investments during a recession, you can consult with a financial advisor or planner. You should aim to stay informed as best you can to understand how your finances are affected, but a professional can help you create or modify your investment strategy based on your goals and risk tolerance.
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Protecting your money during a recession requires a comprehensive approach. Many strategies are no different from what you should do on a regular basis, but become even more important when market conditions are less stable. If you can continue to make smart financial decisions during a recession, you’ll be more likely to maintain financial security and more likely to continue building wealth in the long run.
