While we are not officially in a recession, we may be heading towards one, with economists expecting the downturn to occur in 2023.
Still, that is not the reason nor the time to panic. On the contrary, by taking the proper steps and preparations, you can be financially ready to navigate a recession should the economy enters one.
Let's look at how you can safeguard your investments against a recession and have peace of mind during such uncertain times.
1. Think Twice About Selling Your Investments
You may want to think carefully about selling your investments, even though many investors consider taking the same action.
While it's right to have cash on hand in preparation for a potential recession, you may be liquidating your investments at a loss. That means you're selling your holdings at a price lower than what you paid to own them.
Moreover, selling your stocks out of fear or short-term market uncertainty may do more harm than good. If you're confident that the companies or funds you've invested in will survive an economic downturn, you'll want to keep them rather than divest them.
2. Focus on the Long-Term
Investing is a game where patience and a long-term horizon usually pay off. While there is some thrill in market movements, they can also put you on edge.
A dip in the market offers an excellent time to buy quality stocks at a discount. You also have the opportunity to dollar-cost average, helping you avoid putting a large sum consecutively into an investment. Moreover, investing this way can ease the volatility that can impact your investments.
3. Remember to Diversify
Diversification is an excellent method for balancing risk and reward and reducing market volatility that may hurt your investments. That is why it's vital that your investment portfolio consists of multiple asset classes, like stocks, bonds, gold, real estate, and more.
You can usually find good income in bonds since they offer a predictable income stream. Moreover, they have the potential to preserve your capital while investing. If you hold bonds to maturity, you can receive the full principal.
Equity funds can also be a good addition to your investments, as they can provide some boost to a portfolio's growth. Or you can diversify with international funds to curb your exposure to economic slumps.
4. Have an Emergency Fund Ready
Having an emergency fund would be critical to cover any unforeseen expenses you may face, such as medical issues or car repairs, as these costs continue to increase.
One way you can start building your cash reserves is by directly allotting 10% of your every paycheck to high-yielding liquid funds. With an emergency fund, the rule of thumb is that it should have three to six months' worth of household expenses.
However, you may need to aim higher than that if you're coping with a recession. More importantly, if you have been let go. Finding a new job during such uncertain times may take about a year if you recently lost your current one.
