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Inflation is at a 40-year high. Interest rates are going up. And gas prices have hit $5 a gallon.
The stock market is taking investors on a roller coaster ride of terrifying declines. Even if he hasn’t looked lately, he knows the value of his retirement account has gone down. Cryptocurrencies are crashing, unsurprisingly.
And now you’re hearing that we may be in a recession, or that it’s inevitable.
You remember the Great Recession and how hard it was for many. So telling him to “calm down” or “this too shall pass” doesn’t address the anxiety he feels about his financial well-being.
It’s okay that you don’t feel like things are okay.
But what you shouldn’t do is make moves based on recession fears that may put you in a worse financial position.
Recessions don’t last forever.
An interest rate increase will affect anyone with a home mortgage, car loan, savings account, or money in the stock market. (Video: Daron Taylor/Mademoiselleosaki)
On average, recessions last 11 months, according to Lindsey Bell, chief money and markets strategist at Ally. The shortest recession on record is the 2020 pandemic-induced recession, which lasted just three months.
Here are seven tips to protect yourself whether or not a recession is looming.
1. Don’t be afraid of a bear market. You may not even know what a bear market is, but be prepared to be petrified by one.
This week, the S&P 500 Index fell into a bear market, defined as a 20 percent drop from a recent high.
The average length of a bear market since 1950 is about 418 days, according to Anthony Saglimbene, global markets strategist at Ameriprise Financial.
“Just change your point of view a little bit and see this as an opportunity if you’re a longer-term investor,” Saglimbene said.
Focus on companies that have strong balance sheets, strong cash flow and products that consumers use and need, he suggested.
“Healthcare and consumer staples companies have often succeeded in recessionary environments because people need their products regardless of the economic environment,” said Christine Benz, director of personal finance at Morningstar.
It’s a good time to take advantage of “dollar cost averaging,” which means you invest the same amount of money on a regular basis, regardless of market ups and downs.
Although stocks are taking a beating right now, they historically bounce back well after a recession. If you don’t have equity exposure, you will miss out on any eventual recovery.
“If you have the cash to put to work today, now is a good time to talk to an advisor and figure out what a good dollar cost averaging strategy might be over time,” Saglimbene said.
2. Don’t try to time the market. Many people may want to get out of the stock market or reduce what they are investing until things get better. That is the definition of trying to time the market. It is impossible to know when is the best time to go out and when to go back in.
“Most people, most mere mortals, can’t time the market,” said Mark Hamrick, senior economic analyst at Bankrate.com. “Even Warren Buffett would admit it.”
Once we hit the bottom of the bear market, S&P 500 stock returns tend to be above average, Saglimbene said.
“One of the things we always train investors and advisors is that when you’re in the middle of a recession or a bear market, you don’t want to make outsized allocation adjustments until the dust settles,” Saglimbene said. “If you’re properly diversified, you’re weathering the storm. The worst thing an investor could do right now is try to time when the market bottomed out.”
3. Get rid of your credit card debt. Now. “The number one job for anyone with a credit card is to pay off their balances as quickly as possible,” said Matt Schulz, chief credit analyst at LendingTree. “When a recession may be on the way and interest rates are rising rapidly, it’s even more important.”
One way to deal with debt is to take out a low-interest personal loan or sign up for a balance transfer credit card. You can get out of debt much faster if you transfer high-interest debt to a 0 percent credit card.
If you can’t qualify for a 0 percent credit card, call your current credit issuer and ask for an interest rate reduction, Schulz suggested. “About 70 percent of the people who asked for one in the last year got it,” Schulz said. “But very few people ask.”
4. Stock savings. Save while you have the extra money because a recession can quickly change your circumstances.
If you don’t have a good emergency fund, consider canceling a vacation or putting off a costly renovation project that you don’t need.
“For many people right now, this inflation problem is akin to an emergency,” Hamrick said.
You don’t want to have to resort to debt if you lose your job or because your wages don’t keep up with historically high inflation, he said.
Also, consider that the standard advice of having three to six months of living expenses may not be enough.
“It makes sense for workers to reduce the size of their emergency reserves based on their own situations,” Benz said.
Younger workers may have more flexibility in their lifestyle to find a roommate or two, or change careers to take advantage of new job opportunities. Therefore, your emergency reserves may be closer to the three- to six-month living expense recommendation, she said.
But if you’re an older worker and can’t change your housing situation and/or have a high-paying skilled position and replacing your income could take longer if you lose your job, err on the side of having a year’s worth. of savings or assets that you can easily liquidate.
5. Establish a backup of your emergency fund. In addition to having a rainy-day recession fund, Benz recommends finding out where you could go for additional funds if you needed them in a pinch.
“A home equity line of credit can make sense in this context, and it’s best to get it when you’re employed and more likely to qualify,” he said.
6. Don’t underestimate the power of having bonds in your retirement portfolio. Usually when stocks go down, bonds balance your stock holdings. But bond prices have also been affected.
Still, in previous recessions, bonds have held up better than almost any other segment of the market, Benz noted.
“In other words, don’t throw them overboard because they’re not working well right now,” he said. “They’re an essential portfolio ingredient, especially for people who are retired or nearing retirement.”
7. Get a side job. Many employers are asking for workers.
There are a record number of job openings, with an unemployment rate of 3.6 percent. According to the Department of Labor, the economy saw job gains in transportation, warehousing, leisure and hospitality, education, health services, and government.
“But obviously there is a risk that unemployment will increase,” Hamrick said.
Even if you don’t need the money right now, it may be a good time to get a second job or find work in the informal economy to increase your income and savings. Now is the time to prepare for the worst and hope for the best.
Source: www.washingtonpost.com