8 tips to protect yourself from a recession

  Warnings of a possible recession are not surprising given how much trouble there is in today’s economy.

Stocks are now in bear market territories. Interest rates, and covid cases, are rising. Inflation remains high. The geopolitical unrest caused by the Russian invasion of Ukraine continues. And all of this combined is sparking recession fears.

Even if the US doesn’t fall into a recession, and there are signs it won’t, there are plenty of economic headwinds that could have potentially negative effects on your finances. So here are some ways to assess your situation to protect yourself against financial loss.

Secure a new job now

With ultra-low unemployment and many job openings, this is a time when the market for job seekers is active. But if there is a recession, that could change quickly. So grab the chance while you can.

“If you’re not working or looking for a better position, now would be a great time to take advantage of the strong job market and secure a position,” said Mari Adam, a Florida-based certified financial planner.

To help you in your search, read here some tips on how to present a resume.

Take advantage of the housing boom

If you’ve been on the fence about selling your home, now might be the time to take the plunge and list it for sale.

The housing market has been on the rise in the United States, with prices rising 15% year-on-year in April and rents are almost 17% higher.

Meanwhile, mortgage rates have risen more than 2% from a year ago, which may reduce demand. “I would suggest that anyone planning to put their house on the market do so immediately,” Adam said.

Cover your short-term cash needs

It is always a good idea to have liquid assets to cover you in case of emergencies or severe market crashes. But it’s especially crucial when you’re faced with big events out of your control, including layoffs, which often spike during recessions.

That means having enough money set aside in cash, money market funds, or short-term fixed-income instruments to cover several months of living expenses, emergencies, or any anticipated large expenses (for example, a down payment or college tuition).

This is also recommended if you are close to retirement or are already in retirement. In that case, you may want to set aside a year or more of living expenses that you’d normally pay for with portfolio withdrawals, said Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab. This should be the amount you would need to supplement your fixed income payments, such as Social Security or a private pension.

Additionally, Williams suggests having two to four years in lower-volatility investments like a short-term bond fund.

That will help you ride out any market crash should it occur and give your investments time to recover.

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Don’t trade from headlines

Quick news reports about rising energy and food prices or talk of a possible world war or nuclear attack are disconcerting.

But making financial decisions based on an emotional response to current events is often a losing proposition.

“Making a step change in the midst of all this uncertainty is often a decision you’ll regret,” said Don Bennyhoff, chief investment officer at Liberty Wealth Advisors and a former investment strategist at Vanguard.

Look back at periods of crisis over the last century and you’ll see that stocks generally rallied faster than anyone could have expected at the time and, on average, did well over time.

For example, since the financial crisis erupted in 2008, the S&P 500 has had an average annual return of 11% through 2021, according to data analyzed by First Trust Advisors. The worst year in that period was 2008, when shares fell 38%. But in most of the years that followed, the index posted a gain. And four of their annual earnings ranged from 23% to 30%.

If you go back to 1926, that S&P average annual return has been 10.5%.

“Staying the course can be hard on your nerves, but it can be the healthiest thing for your wallet,” Williams said.

It is not to discount the seriousness of the nuclear threats or the possibility that this period could diverge from historical patterns. But if things really escalated globally, he noted, “we’d have more to worry about than our investment portfolios.”

Check your risk tolerance

It’s easy to tell you have a high risk tolerance when stocks are through the roof. But you must be able to withstand the volatility over time that investing inevitably entails.

Therefore, review your positions to ensure they still align with your risk tolerance with a potentially more difficult road ahead. And while you’re at it, find out what “losing” money means to you.

“There are many definitions of risk and loss,” Bennyhoff said.

For example, if you keep money in a savings account or certificate of deposit, inflation is likely to outpace any interest you earn. So while you keep your capital, it loses purchasing power over time.

On the other hand, if preserving capital for a year or two is more important than risking losing it, which might happen when you invest in stocks, that inflation-based loss may be worth it because you’re getting what Bennyhoff calls a “return.” to sleep peacefully.”

That said, for longer-term goals, find out how comfortable you are with risking for a higher return and avoid inflation taking away your savings and profits.

“Over time you will be better off and more secure as a person if you can increase your wealth,” Adam said.

Rebalance your portfolio and investments

Given record stock returns in recent years, now is a good time to rebalance your portfolio if you haven’t done so in a while.

For example, Adam said, you might be overweight in growth stocks. To help stabilize your returns going forward, the expert suggested perhaps reallocating some money into slower-growing dividend-paying stocks through a mutual fund.

And check that you have at least some bond exposure. While inflation has resulted in the worst quarterly performance on high-quality bonds in 40 years, don’t write them off.

“If a recession were to come about because of the Fed’s aggressive rate hikes to quell inflation, bonds are likely to do well. Recessions tend to be much kinder to high-quality bonds than stocks.” Bennyhoff said.

Make new investments slowly

If you have a large lump sum — perhaps you just sold your business or home, or received an inheritance or a large bonus — you may be wondering what to do with this money now.

Given all the global uncertainty, Adam recommends investing it in smaller chunks on a regular basis, say every month for a set period of time, rather than all at once.

“Space your investment over time as this week’s news will be different than next week’s news,” she said.

Keep it up. Do your best. And “let it go”

Whatever the news today, building financial security over time requires a cool, steady hand.

“Don’t let your feelings about the economy or the markets sabotage your long-term growth. Keep investing, be disciplined. History shows that what people, or even experts, think about the market is often wrong. The best way to Reaching your long-term goals is simply to keep investing and stick with your investment,” Adam said.

Doing so will help minimize any damage a choppy market may cause in 2022.

“If you’ve built a properly diversified portfolio that matches your time horizon and risk tolerance, the recent market downturn is likely just a blip in your long-term investment plan,” Williams said.

Also remember: it is impossible to make perfect decisions since no one has perfect information.

“Gather the data. Try to make the best decision based on that data plus your individual goals and risk tolerance,” Adan said. Then, she added: “Let it go.”

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