Key points to remember
- Getting your financial house in order is essential to surviving a recession and even the current level of market volatility.
- Investors need to understand a recession, a bear market, and bear market rallies to limit losses.
- Take advantage of the slow economy to save money and earn money.
With fears of a looming recession, many investors want to know what they can do to protect their money. Below are a handful of tips that will put you in the best financial position to ride out any recession and maybe even profit from it.
Is it too late to act?
By the time you read this, you’ve probably already lost a significant amount of money over the course of the year. That’s why experts say no one can beat the stock market. He begins to react to rumors long before the negative news arrives.
For example, there is still talk of a possible recession, and the market is down more than 20% for the year. Higher-growth tech stocks are down 30% to 70%. If a recession hits, chances are the market will go down further. So the first thing you need to do is to always stay on top of your finances, whether times are good or bad.
What you shouldn’t do is throw in the towel. Even if you have lost money, you can lose more if things get worse. In 2008, the stock market lost almost 50%. In other words, you can act now while protecting yourself.
Review your investment plan
It is essential that you review your investment plan. If you don’t have a plan, now is the time to make one. Your plan should outline why and what you are investing in, your risk tolerance and your time horizon.
Having an investment plan helps you get through tough economic times because we all get emotional, especially about money, and are prone to making bad decisions. Having a plan can limit emotional decisions because you will have clearer goals and guidelines to base those decisions on.
Finally, be sure to update your investment plan regularly. That doesn’t mean you have to reinvent the wheel at the start of each year. But, every five or ten years, as you get older, your asset allocation should probably change, because your goals will change. Updating your plan gives you a guide to making better investment decisions.
Take a long-term view
When times are tough and the market falls, we get nervous or scared and want to react to short-term pain. But you have to keep a long-term view. You need to understand that over time the stock market will come back and the economy will improve. It’s always like that.
In fact, the average recession only lasts ten months. The average bear market lasts 289 days, that’s less than a year.
The 2008 bear market lasted longer, 18 months. But the result was the same. The stock market and the economy have returned.
As difficult as it can be when things are going badly, you have to focus on the long term. If you find it difficult, turn off the news, stop reading about the economy, and stop checking your investment account balances every day. The less exposure you have to negative information, the less likely you are to react (or over-react).
Don’t be fooled by market rallies
A mistake many investors make is to get caught up in bear market rallies. These rallies are often defined as stock market increases of 5% or more during a bear market. The pessimism of a weak economy subsides and optimism takes over. As a result, the stock market is recovering.
The problem is that this is only a temporary rally. Optimism will fade as more bad news comes out. The market is expected to decline further. Some investors take this rally to mean the recession is over and then start investing again, only to lose money when the rally ends.
It is essential that you know that bear market rallies happen all the time. Investors should try to stay on top of economic reports, taking all of them into account. If one is positive, but the others are still negative, chances are the bear market won’t end anytime soon.
Build your investment fund for rainy days
A smart decision is to have cash on hand to take advantage of a stock market decline. This allows you to buy low and sell high within months or even years when the market fully recovers and you are ready to sell.
Some like to have 5-10% of their portfolio ready to invest, while others like to have higher amounts. It all depends on your financial situation. The main thing is not to invest everything at once. As mentioned above, there are rallies during a bear market.
You want to choose when to invest, and you want to know when a stock has bottomed out. In other words, you might think the current price of a stock is cheap, so you’re taking a position only for the stock to drop another 3%.
It is almost impossible to time the market and it usually has more to do with luck than skill. So your goal here is to do your research and buy when you think the stock is undervalued. If it drops a little more, you can buy more. After all, if your research has shown it to be a good buy at a higher price, it’s likely to be a better buy at that lower price.
Pay off high interest debt
Another key financial measure as a recession approaches is to pay off as much high-interest debt as you have. You never know how long an economic downturn will last, so you need to maximize the money you have available for day-to-day expenses and investments.
If a large portion of your monthly income is spent on debt, it’s harder to make ends meet. Add to that a potential job loss or pay cut, and your finances quickly become much more complicated and stressful. Therefore, do what you need to pay off all or at least some of your existing debt. This could mean taking a second job or working here and there.
Understand your professional situation
Without a job, you have no money coming in and there is no guarantee of employment in a recession. Depending on the severity of the recession, many employers will lay off workers, just look at what is happening in technology today.
You should make an honest assessment of your job security. If you think you are a candidate for layoff, is there anything you can do now to reduce that likelihood? Is there a skill you could learn that makes you more valuable to your employer? Could you take on more responsibility, making it harder for them to let you go? Or even a relationship between colleagues that needs to be improved?
Even if you are working, there is always a chance that you will lose your job. Therefore, you need a backup plan. What will you do for income? Are there any companies or companies you want to work for? Being unemployed is stressful, but having a plan can help alleviate some of that stress.
Make sure you have an emergency fund
An emergency fund can be the difference between surviving a recession and falling far behind where you hoped to be. Most experts recommend having six months of living expenses in your emergency fund. Depending on your risk aversion and situation, you may want more. You really don’t want less. The more money you have to lean on, the less stressed you will feel.
For some, that kind of savings seems out of reach. This is a great time to review your spending habits and try to reduce them. Do you need three streaming services? Can you shop around for insurance coverage to save money? Can you sell your car and buy a cheaper used car?
Take advantage of the weak economy
Finally, there are some things you can do to get ahead financially when the economy is weak. First, keep an eye on interest rates. While the Federal Reserve raises rates to reduce inflation, during a recession it will eventually pivot and start lowering rates to revive the economy. If rates drop below what you’re paying on your mortgage, consider refinancing to save money.
If your finances are sound, you can contact the employers you would like to work for. While they are cutting jobs, you can get hired if you accept lower pay. Have an agreement that as the economy improves, your salary will in turn increase.
Another option is to be on the lookout for offers. Retailers will cut prices to move inventory. Entrepreneurs might be looking for work. Others might sell things for money so they can survive. You might get some great deals if you want to update your home or buy a sofa or a car. But you can only take advantage of these offers if your finances are healthy.
Following these tips can protect the money you’ve worked so hard for. But these tips do not guarantee you will lose money or your job. Anything can happen during a recession and losses happen all the time. The key is to build a safety net to minimize losses and then be able to profit from the other side.
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