How To Prepare For A Recession: Investing, Spending And Saving Tips To Protect Your Wealth
With the recent tumultuous performance of the stock market, recession fears are rampant. Americans are wondering, “Is a recession coming?” This article will help you understand, “What is a recession?” and educate you about how to prepare for a recession and what to do before a recession.
Are we in a Recession?
Recessions are a normal part of the ebb and flow of U.S. economic activity. A recession is an economic decline in growth, lasting at least several months and typically can’t be predicted until after the recession has occurred.
The beginning phases of a recession include, slowing job growth, increasing inflation, and squeezed profit margins.
During a recession:
- Economic production decreases
- Jobs are cut
- Consumers spend less
- Company profits fall
The diagram below illustrates the economic growth cycle:
Whether we are in a recession or not, right now, is uncertain. Watch for the signs and start preparing for a recession today.
What to do Before a Recession?
The time to prepare for a recession is now.
Prepare for a Recession by Getting Your Financial House in Order
Get a good look at your financial picture. Understand your income, expenses, debt, savings, investments and net worth. Consider consolidating accounts to simplify your financial picture.
Make sure you have an emergency fund, that’s three to six months or more of ready cash. If you lose your job, or encounter a big expense, you don’t want to dip into your 401k or investment portfolio, especially when stock prices are falling. Keep your emergency fund in a high yield money market account or short term CD.
Once you have a complete financial picture. Delve into your investment portfolio and make sure it is set up for the long term.
Consider your asset allocation, that is the percentage of stocks vs. fixed income, and your risk tolerance.
Recession-proof your asset allocation, by making sure that it is designed to account for your risk tolerance level. A well diversified investment portfolio, with the best mix of stocks and bonds, for your risk comfort, tends to bounce back from market volatility. If you are young and can tolerate a stock market decline of 20%, 30% or more, without selling, then a higher percent of stocks will work for you.
If you’re older, or cannot stomach the volatility of the stock market you might need to ramp up your bonds and fixed income investments. A conservative rule of thumb, to help guide your asset allocation might be:
Take your age and subtract it from 100. Then invest the resultant percent in stock assets with the remaining percent in fixed assets. If you are 40 years old, according to the classic advice, you should have 60% in stocks and 40% in fixed assets. (100-40 years old=60% stock assets)
If you’re a more aggressive investor, then tweak your investments to include a greater percent of stock assets and vice versa for conservative investors.
Once you’re comfortable with your investment asset allocation, and you have three to six months cash, or more, you are prepared for a recession. It’s important not to sell stocks, after a market decline. If you do that, you’ll lock in your losses and might also miss the upside if you’re not back in the market when prices reverse course.
Things to Buy Before a Recession
Before a recession, inflation may ramp up. When you encounter a whiff of rising inflation, it is time to stock up on non-perishables, before prices rise. visit your big box store to stock up on products that endure such as canned goods, toiletries and staples. Then, as prices rise, you won’t have to buy those items at the new higher prices.
Don’t Panic When Preparing for a Recession
How likely is a recession?
Recessions are a normal part of a growing economy. You’ll notice in the chart below that we’ve had 13 recessions since 1942. And after every recession and stock market decline, the stock market prices have gone on to surpass the prior losses. In fact, since 1928 through 2024, the stock market has averaged nearly 10% growth annually.
Do not try to time the markets, but set your investment portfolio, in line with your asset allocation now. Then rebalance every six to 12 months. That way, you’ll reduce your portfolio volatility, by buying more shares when stocks are down, and fewer at the higher prices.
No one can time the market, and know the perfect time to get in and when to sell. Armed with data and information, keep calm when you prepare for a recession. Recessions pass, as do economic expansions. It is all part of a normal part of a growing economy.
Let’s check out 2003 through 2023, which has included three recessions and many more stock market declines. If you stayed fully invested during that 20 year period, your annual return would have been 9.7%. If you missed the five best days during those 20 years, your annual return drops to 7.2%. Miss the 15 best days, and you’d have earned only 4.1% annually. Finally, miss the best 30 days, and you don’t even earn a one percent return.
The moral of that story is, do not jump in and out of the markets, if you’re worried about a recession or a drop in the stock market, check your asset allocation and stay invested.
Consider Consulting with a Financial Advisor
If you’re not comfortable handling your own investments, or you just want to speak with a financial professional, then consider consulting with a financial advisor.
If your investments are at one of the larger financial firms, like Fidelity or Schwab, you might be able to chat with a free financial advisor, and get basic advice.
How to Prepare for a Recession – Wrap up
We are headed for a recession! But the question is not “if” but “when.” Recession predications are notoriously difficult to make. Similarly, timing the investment markets is nearly impossible. So, the best path to take, if you have recession fears, is to understand what a recession is and prepare for it in advance. Get your investment portfolio aligned with your risk tolerance level. Stock up on non-perishable items, if you have inflation fears and stay the course.
Remember, most of us are investing for future goals, and a few dips in stock prices and the economy is normal and is unlikely to damage your long term financial success.
This post originally appeared at Barbara Friedberg Personal Finance.
Category: Stocks
