Smart Ways to Prepare for a Recession or Bear Market
Here at Wealth Daily, we’re not in the business of making doomsday predictions. We don’t believe the economy is on the brink of another 2008-style meltdown — and even if we did, we wouldn’t recommend extreme measures like going all cash or shorting the major indexes.
After all, as the old saying goes, time in the market beats timing the market.
However, this bull market is no spring chicken, and bearish indicators are starting to line up.
Back in March, we explained how the yield curve inversion could foreshadow a downturn in the next couple years. Last month, Briton Ryle bemoaned the worrying implications of interest rate cuts at all-time highs. And more recently, Jason Stutman warned readers that optimism about the U.S.-China trade war may be misplaced.
With all this in mind, where is the middle ground between panic selling and sticking your head in the sand? What are some reasonable steps investors can take to prepare for the next recession or bear market?
Today, we’re going over a few of them...
A basic principle of investment strategy is that your risk tolerance should decrease as you age. And you’re now about 12 years older than you were during the last recession.
Have you rebalanced your retirement accounts since then? Are you comfortable with the risk level of your current portfolio?
If the answer is no, consider moving some money out of high-risk investments like small caps and tech stocks and into defensive investments like bonds and dividend stocks.
Another way to reduce your risk is to build a small cash position.
To be clear, we do not recommend going all cash or even mostly cash. Doing so is basically an attempt to time the market and will almost certainly mean missing out on some capital gains and income.
But some of the most successful investors in history have maintained small cash positions to allow them to scoop up discounted assets during downturns. Warren Buffett’s Berkshire Hathaway is currently sitting on about $112 billion in cash — roughly 22% of its market cap.
And a recent Bank of America study of households with investments worth $3,000,000 or more found that a plurality hold 10% to 25% of their portfolios in cash.
Build a Bigger Emergency Fund
Even if you don’t build a cash position in your investment portfolio, you should definitely make sure to have some cash on hand in the event of a budget shortfall.
An emergency fund is one of the bare necessities of personal finance — and it’s an especially important part of preparing for a recession.
Recessions, after all, generally put a lot of people out of work. If you’re one of them, you’ll need an emergency fund big enough to sustain you for at least 20 weeks without a paycheck. That’s the average amount of time it takes for an unemployed person to find a new job.
That’s why many financial planners recommend keeping three to six months’ worth of expenses in a savings account. Bonus points if you use a high-yield savings account or money market account to collect a bit of interest from your emergency fund each year.
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Pay Down Debts
It should be obvious that getting out of debt is a good way to prepare for a recession or bear market. You don’t want it hanging over your head along with all the other stresses associated with economic downturns.
But there’s another reason paying off debt is particularly important in the lead-up to a recession.
In an economic worst-case scenario — one in which you’ve lost your job and exhausted your savings — a loan might be the only way to pay the bills.
Of course, loans can cause more problems than they solve if you’re stuck with a high interest rate. But interest rates are largely determined by borrower credit scores. And paying down existing debts is one of the fastest ways to improve your credit score.
If you can bump up your score a few dozen points by paying off existing balances, you could end up saving yourself thousands of dollars in interest in the event that you need to borrow money to make ends meet during a future recession.
There are several approaches to paying down existing debts, including the “snowball method” popularized by Dave Ramsey (prioritizing the debts with the lowest balances), the “avalanche method” (prioritizing the debts with the highest interest rates), and debt consolidation loans.
Recession forecasting is generally a fool’s errand. Many investors have missed triple-digit gains in the last decade by staying out of the market in anticipation of the “next big crash.”
While we don’t recommend exiting the market, it’s easy to understand why many investors are looking to prepare for the next recession. And we’ve just discussed three simple steps you can take to do exactly that.
Looking for even more protection against an economic downturn? Check out Christian DeHaemer’s Bull and Bust Report. Subscribers are already pulling in big profits from this time-tested expert’s contrarian, late-cycle investment recommendations. Click here to learn more.
Until next time,
Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.
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