Rising inflation, rising interest rates and generally negative consumer sentiment have weighed heavily on today’s economy. As a long-term investor, there isn’t much you can do to change broad market indicators, but there are some things you can do to help them overcome them, especially in the event of a recession.
Let’s take a quick look at four ways you can prepare for a possible economic downturn.
1. Protect your emergency fund
You will rarely regret having more money on hand than you need. That’s why you should keep at least six months of your living expenses in an easily accessible, liquid savings account. You can easily compare the interest rates of different providers to find the best deal. However, the most important aspect of the emergency fund is that it is protected from market fluctuations and you can access it quickly.
It’s easy to think that you can just invest your emergency fund in certain stocks, like dividend stocks or bond funds, but it’s really not recommended. As we’ve seen, markets can and do fall quickly, so you need to be sure to stay safe on the sidelines with your emergency fund.
2. Keep making money
This might sound obvious, but it’s best if you don’t take large amounts out of your wallet during a recession. When stock values have fallen, selling stocks to cover daily living expenses can significantly reduce your portfolio’s long-term growth potential.
If you are just starting your career, you should try to make yourself indispensable for your current business and consider alternative sources of income if necessary.
If you are in early retirement or retirement, any extra income is very important in maintaining your savings. While there are certainly pros and cons to working in retirement, earning an income can help you limit the drain on your wallet and have non-financial benefits as well.
3. Keep investing
Emotionally counterintuitive, when markets are in turmoil it is actually the best time to invest. With every dollar invested, you are buying more stock than when the market was at its peak. When the market recovers, you will have more than you started (assuming you haven’t made any withdrawals in the meantime).
If you stop investing after a price drop, you are undoubtedly limiting your wealth creation potential. Choosing a fixed range and investing regularly (for example, once a week, once every two weeks) is a smart strategy when it comes to financial planning, regardless of what is happening in the stock market.
Check what you can
Falling markets are no fun for almost any retail investor. But there are some things you can do to make your life a little easier in the long run, especially when we’re in a protracted crisis. You should protect your emergency fund, keep working and keep investing.
There is only so much we can control when it comes to investing, so make sure you do everything you can to protect yourself and your investment portfolio.
The article Afraid of a recession? How to Prepare first appeared in The Motley Fool Germany.
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This article was written by Sam Swenson and was posted on Fool.com on 6/15/2022. It has been translated so that our German readers can join the discussion.
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