For months, economists have debated the likelihood of a recession. While the future is still uncertain, more experts are expecting it to happen in the relatively near future.
Officials at the Federal Open Market Committee now predict a "mild recession" at some point in 2023, due in part to the shakiness within the banking sector. And analysts at JPMorgan Chase believe there's a greater than 50% chance we'll see a recession by the end of the year.
Nobody knows for certain when or if a recession will occur, and, if it does hit, how bad it will be. But there are a few smart steps you can take right now to protect yourself.
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1. Strengthen your emergency fund
Market downturns are one of the worst times to pull your money out of the market. Because stock prices are lower, you may end up selling your investments for less than you paid for them -- locking in those losses.
While the market and the economy are two separate entities, stock prices often fall during recessions. If you face an expected expense or lose your job and all of your savings are tied up in your investments, you may have no choice but to pull your money out of the market at the worst possible time.
For this reason, most experts recommend having enough cash in an emergency fund to cover around three to six months' worth of general living expenses. Then if you do face tough times, you can leave your investments untouched.
2. Avoid making any knee-jerk decisions
Recessions and market downturns are tough to stomach, even for the most seasoned investors. Nobody likes watching their portfolio drop in value, and if you're worried about falling stock prices, it can be tempting to get out of the market before the worst of it.
However, panic-fueled reactions like this can often do more harm than good. Again, selling your investments now may result in locking in losses, as the market has already fallen from its peak. Also, though, if you sell your stocks and the market surges, you'll miss out on those potential earnings.
Re-investing later could also be costly in this situation. If stock prices rise and you decide to invest again, you may be paying a premium for the exact same investments you just sold.
While it's easier said than done, staying patient and calm is key during periods of volatility. Effectively timing the market is next to impossible, so one of the best things you can do right now is ride out the storm.
3. Keep a long-term outlook
In times like this, history can be reassuring. While past performance doesn't necessarily predict future returns, the market has a decades-long track record of recovering from even the worst recessions and bear markets.
Another reason to be optimistic is the fact that the market almost always begins its rebound before the economy. In nearly every recession in the past 50 years, for example, the S&P 500 started its upward climb before the economy bottomed out.
It's easy to feel discouraged about the future right now. But a bull market is coming, perhaps sooner than you think. By keeping a long-term mindset, it can be easier to get through the challenging times.
4. Load up on quality stocks
Recessions are important tests for companies. Even weak organizations can often thrive during periods of economic growth, but downturns will separate the healthiest businesses from the rest of the pack.
To give your investments the best possible chance of surviving a recession, it's crucial to invest in the right places.
The best stocks are the ones from companies with solid business fundamentals, such as strong finances, a knowledgeable leadership team, and a competitive advantage in the industry. Businesses that are strong in all of these areas may still take a hit during a recession, but they're far more likely to recover.
Also, though it may not seem like it, now is the time to load up on these types of stocks. Even some of the healthiest companies have seen their stock prices plummet over the past year, so now is your chance to load up on quality stocks at a discount. When they eventually rebound, then, you'll be in a fantastic position to earn potentially lucrative returns.
It's unclear what will happen with the stock market in the coming months, or when (or if) we'll face a recession. But by taking these four steps now, you can protect your money as much as possible.
