There is a 64 percent chance the financial system will contract by the end of this year, according to Bankrate's quarterly survey of economists released in April. Experts say this is due in large part to the recent bank failures and the Federal Reserve's increasingly restrictive policies to combat inflation in the face of a stubbornly strong U.S. economy.
Of course, that still leaves a 46 percent chance that a recession won't happen in 2023 — and this is just one survey. But if you're worried about those odds and want to make sure you're in the financial shape to weather whatever the future may bring, here are five expert tips to prepare for a possible recession.
1. Assess your existing financial plan
Before you get too deep into panic mode, it's helpful to take a step back and "consider where you are at in your financial life," as Kiplinger puts it. Are you early in your career and working to build up your investment account? Or are you approaching retirement? In the former situation, you might view a market downturn as a "welcomed entry point," since "stocks are being sold at lower prices, and you can add more shares to your portfolio at a discount," Kiplinger says.
It's also important to assess time horizons for potential investment opportunities you take on before the market gets rocky. For instance, Kiplinger recommends keeping investments like stocks or other higher risk investments for at least three to five years — will you be able to hold tight when the going gets tough?
You also might add in a little cushion based on how you've responded to market ups and downs in the past. "If you pulled your money out of the market, or otherwise couldn't deal with the volatility, you may want to rebalance into a slightly more conservative portfolio so you can feel confident and weather future market drops with less stress," Nerdwallet suggests.
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2. Make sure your portfolio is diversified
Diversification — which "doesn't just mean allocating your money across different forms of investments like stocks or bonds," Nerdwallet points out, but also "across industries, geographic locations, and companies of various sizes" — is always important to mitigate portfolio risk. But during a recession, diversification becomes especially important. After all, you don't want to put all of your eggs into one basket that sinks with the market.
If your portfolio isn't diversified, now is a good time to act. How to do that? Kiplinger suggests investing in a "variety of asset classes such as stocks, bonds, real estate, and alternatives to spread your risk over many areas."
3. Build up cash reserves
Recessions bring uncertainty, and that can feel easier to handle if you have a cash reserve tucked aside in the event something should happen, like an unexpected job loss. You can build up savings either by spending less (you may be surprised by how much extraneous spending your budget contains) or looking for ways to earn more. A budget can help you better keep track of where your money is going.
As far as how much to squirrel away, "you should try to save enough to cover three to six months of essential expenses," Fidelity recommends. If that sounds like a lot, Fidelity suggests getting started "by saving $1,000 or one month's worth of essentials and then keep going until you've hit a level that helps you feel secure." Consider keeping at least some of the money you've saved in liquid savings to ensure you can access it if necessary.
Depending on your risk tolerance and time horizon, you might also consider adding some cash in part of your portfolio (alongside potentially reducing riskier assets like stocks), which is a way to "build systematic shock absorbers into your portfolio," Kiplinger says. This can be especially helpful "if you need to live off your money and you need more protection on the downside," Kiplinger adds.
4. Take a beat before reacting to financial news
If you tend to stay glued to the news, fear can start to bubble up when more bad headlines about the markets roll in. While your emotions might be screaming at you to sell, it's important that you don't, because "selling during market lows can be one of the worst things you can do for your portfolio," Nerdwallet warns. "It locks in losses."
Instead, it's a more helpful mindset to realize that "market volatility is a regular part of life in the stock market," Fidelity says. Eventually, things will level back out. And if that's not reassurance enough, look to investors in recessions past: "Historically speaking, investors who hold on to their investments through recessions see their portfolios completely recover," Nerdwallet says.
5. If you're going to buy, buy strategically
For certain investors, a market downturn can be "like a sale," Kiplinger says. Prices are lower, so you might be able to buy more shares than you usually would. This approach is called "buying the dip."
As far as how to do it, "think about picking a few investments you've always wanted to own and give yourself a price threshold you feel comfortable with," Nerdwallet advises. It also advises against getting too hung up on perfect timing, since it's next to impossible to time the market just right.
Meanwhile, "investors who want to survive and thrive during a recession will invest in high-quality companies that have strong balance sheets, low debt, good cash flow, and are in industries that historically do well during tough economic times," Investopedia says. Industries that are generally "more recession-resistant than others" include "utilities, consumer staples, and discount retailers." On the other hand, the "companies and assets with the biggest risk during a recession are those that are highly leveraged, cyclical, or speculative. "
And while there is always the risk of loss when investing, if you're investing during a recession, you should be comfortable with the possibility of losing money. Nerdwallet cautions that "if you're already feeling financially strapped or may be facing unemployment, don't hedge your bets on a volatile market."
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com.
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