The headlines are in and the news is mixed, will there be a recession to hit Iowa or not? In 2023, the message is clear – prepare > predict.
In the face of a market downturn, it can be hard to know where to put your money. While panel members of Iowa’s Revenue Estimating Conference say there’s no sign of an economic recession in Iowa, they did say the current state of the economy makes it very difficult to predict what will happen.
What is a Recession?
It’s no secret that recessions are usually accompanied by outright bear markets, with stocks falling by well over 20%, and often by much more. And with the Fed now hiking rates aggressively, the bond market is no safe haven. Equities and bonds are riskier than usual, and surging inflation means that even cash under the mattress is losing its purchasing power. So what exactly is a recession? The textbook definition: A recession is a prolonged period of economic decline, beginning when the economy peaks and ending when it bottoms out. Recessions are typically marked by an economy shrinking in back-to-back quarters, measured by gross domestic product (aka, how much are we collectively buying and producing as a society).
Certain indicators, like corporate earnings, consumer spending, and jobs data can give you a hint at the economy’s overall health.
But there are options for investors who want to protect their future but remain invested in the stock market. In fact, there are several ways to help hedge your portfolio against potential losses—and help increase your return at the same time. Here’s what you need to know.
Cutting Back
One of the biggest questions is what can Americans do to protect themselves. One answer is to do nothing and ride out volatility. For others, they might consider cutting back on non-essential spending and big ticket purchases. With a potential recession in the horizon it’s always best to put away money and save it for a rainy day.
Here are some other ways you can cut back on spending:
- Take shopping apps off your phone.
- Go on a short-term spending freeze.
- Avoid using your credit cards.
- Buy used items.
- Wait before you buy.
Ramp Up Savings
Having a healthy savings account is one of the best ways to help prepare for a recession.
By taking extra time to ensure that you have an emergency fund and having the right insurance, you will help protect yourself and your loved ones against the unknown.
- Emergency Fund: Having money set aside to cover unexpected costs is an essential part of financial planning. If you don’t have an emergency fund, then you are more likely to be forced into debt during an emergency situation such as a recession – and less likely to be able to get out of it quickly. Having a small amount of money saved up allows you to help avoid taking on unnecessary debt in an emergency situation, which can help save you money in interest payments and reduce the amount of stress associated with unexpected expenses.
- Insurance: Insurance can provide much-needed protection from many different types of potential risks, including illness or injury, home damage due to natural disasters such as fires, and even death itself. By purchasing health insurance coverage and keeping it up-to-date, you can help protect yourself against medical emergencies that could cost thousands of dollars (or more) if left untreated. Similarly, homeowners’ insurance can help protect your home (and any belongings inside it). If a recession is to hit, you need to make sure you are properly covered for these large potential expenses.
By its very definition, “unknowns” can’t be meticulously planned for. But if you give yourself enough of a margin for the uncontrollable, with other adjustments, you can work to help control the impact the economy has on your retirement plans.
Making Career Moves
If you’re close to retirement and concerned about the recession threat, you may be looking for a job. This is a great time to start your search as the job market is coined as the people’s market. The unemployment rate is 3.7%, which is the lowest it has been in decades. More and more jobs are being created which can lead to a great opportunity if you’re looking to make a career move.
Consider updating your resume and making any career moves while the job market is still hot—before it cools off with all those other people who might be competing with you for positions. The relatively secure jobs are with companies whose products or services customers need day in and day out—even during a recession—making such firms less vulnerable to the economy’s troubles. There are many jobs available that you can do on a freelance, temporary, short-term, part-time, or seasonal basis (such as consultancy roles, substitute teaching or even house-sitting jobs).
Help Recession Proof Your Portfolio
Recession-proofing your portfolio is all about having a diverse portfolio. Diversification helps reduce risk. As such, investors should ensure that their investment portfolios are well-diversified when going into a potential recession.
If you are invested in only stocks, you can diversify by looking at different industries, company sizes, different ratios, etc. This can also mean splitting your portfolio between cash, stocks, bonds, real estate, and so on.
Another option is to reallocate your current holdings. This can include converting more of your portfolio to a safer option such as bonds or different holdings. Before making any amendments to your current portfolio, we always recommend talking with a trusted Fiduciary financial advisor.
Final Thoughts
It’s very difficult to predict when a recession will occur, how long it may last, or its financial impacts. But there are steps you can take now (or anytime) to prepare for a recession.
At Johnson Wealth and Income Management, we can help you understand different retirement planning and investment methods, including the ones to help stave off the impacts of a recession. Now more than ever, financial education is important, so you can feel good about where you are with your money, regardless of any challenges ahead.
If you’re looking for an experienced firm that can provide income planning with the utmost level of care and professionalism, look no further than Johnson Wealth and Income Management.
Contact us today to get started.
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