How to protect yourself during a recession
We are currently living in times of uncertainty and market volatility, with inflation beating previous records, the geopolitical tension with the Ukraine war, interest rate hikes, euro-dollar parity, the crypto market bear market, the massive rise in the cost of energy, and much more..
All of these are impacting and will impact your ability to generate wealth in the long-term. For example, if you are an EU citizen, as of June 2022, taking inflation from the Eurozone of 8.6%, your capital has lost approximately 8.6% of its worth. In addition, the euro-dollar parity has meant that European citizens now have less purchasing power in dollar-led economies.
In this article I will outline the most intelligent moves an individual could follow in order to minimise the damage and remain protected for the rest of the bear market.
I am no financial expert, so don’t act on my words. Carry out your own research and build your own conclusions. If you remain calm and think logically, you will not only protect your capital, but also multiply it by the time the next bull market arrives. Remember to take the opportunities that arise in bear markets.
Enjoy.
Cover your short-term cash needs
It is always a good idea to have liquid assets to cover yourself in case of emergencies or severe market downturns. But it is especially crucial when you face major events beyond your control, including layoffs, which tend to increase 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 large anticipated expenses (e.g., a down payment or college tuition). I would recommend at least 6 months.
Don’t trade on headlines.
Fast-moving news reports about rising energy and food prices or talks 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 radical change in the midst of all this uncertainty is often a decision you will regret.
Look back at periods of crisis over the last century and you will see that stocks generally recovered 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 averaged an annual return of 11% through 2021, according to data analysed by First Trust Advisors. The worst year in that period was 2008, when stocks fell 38%. But in most subsequent years, the index posted a gain. And four of its annual gains ranged between 23% and 30%.If you go back to 1926, that average annual return for the S&P has been 10.5%.
You should focus on sticking to the plan, although it may be hard on your nerves, but it is usually the healthiest thing to do for your portfolio.
Check your risk tolerance
It’s easy to say you have a high tolerance for risk when stocks are sky-high. But you must be able to withstand the volatility over time that inevitably comes with investing.
So review your positions to make sure they still align with your risk tolerance with a potentially tougher road ahead. And while you’re at it, find out what «losing» money means to you.
For example, if you keep money in a savings account or certificate of deposit, inflation is likely to outpace any interest it earns. So, while you keep your capital, it loses purchasing power over time.
That said, for longer-term goals, find out how comfortable you are with taking risks to earn a higher return and keep inflation from eating away at your savings and earnings.
Rebalance your portfolio
Given the record returns of equities in recent years, now is a good time to rebalance your portfolio if you haven’t done so in a long time.
In the event of a recession due to the Fed’s aggressive rate hikes to «lower» inflation, bonds are likely to do well. Recessions tend to be much kinder to high quality bonds than to equities.
Make new investments slowly
If you have big chunks of cash, the smart thing to do is to put that capital into investing in high quality companies.
However, given all the global uncertainty, I recommend investing it in smaller chunks periodically, for example, every month over a set period of time, rather than all at once. This is called «Dollar Cost Averaging». This strategy has been proven to beat the «market timers.»
Keep at it. 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 achieve your long-term goals is to simply keep investing and stick to your investment.
If you do, you will help minimise any damage that an uneven market can cause.
If you have created a properly diversified portfolio that matches your time horizon and risk tolerance, the recent market decline is likely to be a mere incident in your long-term investment plan. Even a source of opportunity, with quality companies at a discount.
Remember too: it is impossible to make perfect decisions as no one has perfect information.
On a Final Note… Gather data and information. Try to make the best decision based on that data plus your individual objectives and risk tolerance and only then, let it go.
