6 things you should do to prepare for the next recession
- Market fluctuations are a fact of life.
- The next recession is coming eventually, but you can get through it just fine if you don't panic, according to certified financial planner Joseph Sweis.
- Don't change your investment strategy. Your long-term savings will regain their value over time.
- An approaching recession is a good time to pay down your debt, so you'll be in a better position if credit gets tight.
As analysts fret that an economic downturn is on the horizon, you might feel a bit panicky.
Joseph Sweis, a certified financial planner and founder of Pearl Wealth Advisors, said that investors should stay calm. "We know markets go through cycles," he told Business Insider. "It's happened all through history."Sweis said that the stock market has delivered an average annual return of around 10% on investments over the past 100 years, despite the stock market crash of 1929 and multiple recessions since then.
But he does have some practical suggestions to shore up your finances to better weather the next recession, whenever it comes.
Know your investment goals and stay the course
"Managing your emotions is just as important as managing your investments," Sweis said. Your investment strategy should be guided by your appetite for risk, he noted, not predictions of a future recession.
If you won't dip into your money for a number of years, he noted that even an aggressive portfolio (such as 80%stocks and 20% bonds) will likely recoup any losses over time.
"Stick with your asset allocation and avoid market timing at all costs," Sweis said. Market timing is the "act of moving in and out of the market or switching between asset classes," including moving your investments into cash to avoid losses, according to Investopedia. Sweis said that some people did this in 2016, thinking a recession was coming, and missed out on market gains.
Keep saving for retirementIf you had a 401(k) or other retirement accounts during the 2008 recession, you might remember your balance going down even as you contributed money with each paycheck. Though this can be alarming, Sweis said that, "even though your bottom line is declining, you're buying more shares with every dollar." When stocks are down, investing is like buying at bargain basement prices.
Sweis said that your asset allocation - how much you invest in stocks, bonds, etc. - should be determined by how soon you plan to retire.
"If your goal is to use your money in less than one year, it should be cash and cash equivalents," he said. If you're more than eight years from retirement, you could hold more aggressive investments. As you get closer to the end of your work life, Sweis said, you should shift your asset allocation gradually to more conservative assets.
Get out of debt
"One of the hallmarks of recession is that credit tightens up," Sweis said. "Banks still want to lend, but they're only lending to the most qualified borrowers."
If you want access to credit, do what you can to pay down your debt and clean up your credit, Sweis said. That's good advice for any time, but it's particularly salient in a recession.
Don't base your home-buying decision on the next recession
"At the end of the day, owning a home is a long-term investment," Sweis said. "It's always better to buy at the bottom, but that's a very difficult thing to do."
Sweis said he doesn't think there will be a housing crash in the near future, because everyone who bought a home after 2010 was a qualified buyer. Still, market timing of the always unpredictable housing market is a recipe for trouble."If you're looking to buy a home, understand the impact to your overall debt and to your monthly cash flow and make sure it's manageable," Sweis said. And don't wait for the next recession, if you're ready to buy now.
Save at least six months of living expenses
"If your focus is to prepare for a recession, make sure you have at least a six month reserve in your bank account," Sweis said. "You want to have a cushion to avoid going into debt during a rough time."
This savings will protect you if you lose your job, a major feature of the last recession. If you think it might be hard to find another job in your field, Sweis suggests holding a whole year of basic living expenses in reserve.
If you can't save a lot, save a little - it adds up over time
The majority of Americans live paycheck to paycheck, according to CNBC. If you are one of them, investing and saving might seem impossible. According to Sweis, you have more power to save than you think.
"Don't underestimate the value of a disciplined budget and the value of compounding," he said. If you can invest just $100 a month, you could eventually be a millionaire. Whether you have a lot of money or a little, Sweis said, "discipline and strategy is what's going to get you through the recessions."