So far this year, we’ve seen the stock market put up record breaking numbers. Unemployment continues to drop and it seems we may have finally clawed our way out of The Great Recession. Analysts, however, are not sure we’re in the clear just yet. In fact several analysts have come out to claim that a market “correction” may happen within the next 18 months. While no one is predicting that the downturn will be anything close to what we experienced in 2008, it’s certainly enough to make you take another look at your finances. Where do you have exposure and what can you do to hedge against the next recession?
Plan For the Unexpected
The best thing you can do to plan for a recession (and life in general) is to have a backup plan in case of emergencies. The first step you can take towards that is funding and emergency savings account. If you’re already struggling to make ends meet and scraping together a savings account seems nearly impossible, start with this article to help you save $1,000. Ultimately you want to work towards a savings fund that could cover your necessary expenses for 3-6 months. Necessary expenses means the absolute minimum that you need to live, such as the cost of groceries and housing. It doesn’t mean you have to be able to afford your normal lifestyle for those 3-6 months. If you were to lose your job, think about the sacrifices you could make temporarily to make your savings last and how much you need just to live for a few months until you are able to find another job.
When determining how much to save, also keep in mind how easy or difficult it may be to find a job in your field. For instance, if your skill set is in high demand, you may only need three months of savings since it may be relatively easy to find another position. On the other hand, if you are a professor of Russian literature, it make take slightly longer to find employment, so you may want to save for additional months of unemployment. Similarly, if you have been on the fence about acquiring training to develop a new skill that would make you more attractive to prospective employers, now may be a good time to pursue it.
No Such Thing as a Safe Bet
Next, you’ll want to take a look at the investments that you own. As a general rule, if you take the number 100 and subtract your age from it, you will be left with the percentage of your portfolio that should be invested in stocks. This helps determine the amount of risk you can afford to take with the idea being that as you get older and closer to retirement, you will lower your risk since you will need to tap into that money relatively soon. Betterment has mastered the art of diversifying. Their user-friendly platform allows you to select the percent you want invested in stocks versus bonds and they take it from there. It’s worth a look if you’re not into actively managing your investments on a day-to-day basis. The remainder of your portfolio should be invested in safer places, such as bonds. When it comes to investing, never lose sight of what the stock market is at it’s core… essentially gambling. That being said, by following the “100 - Your Age” rule and by investing in financial instruments like mutual funds and ETFs, you can help diversify your overall exposure to risk.
Take Advantage of Potential Opportunities
“Buy Low, Sell High.” That wisdom still applies in its most basic form today. When the next recession hits, it may be a great time to pick up stocks at prices that are lower than usual. This allows for more potential growth when the market eventually rebounds. The same may also apply to real estate and other investments. Just remember there are no guarantees, so if you can’t yet afford to take the risk, keep you money in more secure investments such as bonds and high yield savings accounts.
Hold Tight and Don’t Make Any Sudden Moves
Lastly, selling off your assets to try to “beat” a recession is like picking a scab. You may find it rewarding at first, but ultimately it will take longer to heal and leave a lasting scar. Don’t make any sudden compulsory moves. Remind yourself that market trends are typically cyclical and most of your investments will likely recover (and then some) in time if you allow them to.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.