We are experiencing an unprecedented decline in economic activity that will have long-lasting effects on not just the United States economy but the global economy in general. Just this week, Goldman Sachs moved from predicting a 5% Q2 drop in GDP to a 24% collapse. And, that’s just the beginning.
While this all might be a bit anxiety-inducing, especially if you’re experiencing job loss or are having to make adjustments to previous investments you’ve made, there are ways to ensure that your investment plan is recession-proof.
As you stay home and shelter in place, we’ll help you make sense of what a potential coronavirus-caused recession might mean for your financial health.
What Usually Happens in a Recession?
To be considered in a recession, an economy must, generally speaking, go through two consecutive quarters of negative GDP growth. This is usually accompanied by a lack of consumer confidence, job loss, and weak production. Do these all sound like things you’ve might have heard of in recent weeks?
During a recession, as it relates to investing in stocks, investment companies tend to avoid taking on too much risk. According to Investopedia, investors tend to “sell riskier holdings and move into safer securities, such as government debt.”
During recessions, you might also find that real estate investing goes down for a bit while investing in stocks that are a bit more diversified goes up. While diversification of your portfolio is always important (to safeguard you against major losses during times like these), it’s even more important in the midst of a recession.
Creating a Recession-Resistant Investment Plan
While nobody could have predicted that we’d be living through a pandemic in 2020, most economists are able to predict when the next recession will hit. Markets go through cycles and some experts even note that we were due to enter a recession in 2021 anyways.
With that in mind, it’s important to remember to always be thinking about how to recession-proof your investments and portfolio, even when we move out of this recession and experience economic growth once again. Here’s how.
Focus on the Long-Term
Whether you’re learning from the best investment apps or some of the world’s best investment firms, they’ll all likely tell you the same thing about your portfolio: focus on the long-term. Never is this more important than when we are in the midst of a recession. Don’t rush to sell off everything you own, especially certain assets that are designed to build your portfolio over time.
To create a recession-resistant investment plan, focus on the long-term and don’t stress too much about what’s happening now. If you’ve spoken with a financial advisor or investment firm and had already invested your money in high-quality businesses who traditionally perform well, then your investments should be safe and continue to grow after the recession is over.
Think About Consumer Staples
If you’re just now starting to invest, experts suggest that a recession is a great time to invest in consumer staples. Again, Investopedia notes that you should stick with “high-quality companies that have long business histories because these should be the companies that can handle prolonged periods of weakness in the market.”
It’s generally pretty safe to invest in the equity market during times like these (again, however, these are unprecedented times; we’ve never experienced a market quite like the one we’re seeing now). So, investing in consumer staples like food, alcohol, tobacco and household goods can be a smart idea given the current economic landscape (and the fact that they’re the only companies truly selling goods to consumers right now).
Invest in the Recovery
During a recession, most governments reduce interest rates to increase the money supply in the country. What this does is it encourages spending so that citizens can begin to stimulate the economy once again and get things back on track. And, that’s great. But, it also increases higher-risk, higher-return investments.
So, keep this in mind when taking a look at your portfolio currently. Invest in the recovery by knowing when to go ahead and start looking at higher risk stocks that are from companies who’ve weathered the economic storm fairly well.
Reset Asset Allocations
Jeff Klauenberg, founder of Klauenberg Retirement Solution told US News that people should consider reducing risk as much as possible to ensure their investment plan and assets make it through a particularly tough recession.
His exact advice to investors, however, is to "Switch your principal allocations (your current assets) into a more conservative allocation, like 30% stocks and 70% bonds. Or you might do 20% stocks and 80% bonds. After you set your allocation, you should leave the same. This way, if the markets drop, your principal is safer, but your new contributions are buying on sale."
Saving Through a Recession
Saving money is on everybody’s mind right now, and understandably so. We’re experiencing unique times as we’ve never seen before, and the financial health of the government and every citizen is uncertain.
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It comes with zero banking fees, savings bonuses, and cashback, and it’s FDIC-insured. You can save without doing really anything, and that’s the kind of change you need right now. Click here to join our waiting list and begin your journey towards earning extra money easily.