Start by asking yourself how a recession could affect your income. If you believe a recession is likely to impact your livelihood, think about how you can earn extra income if needed. Freelancing, joining the gig economy, tutoring or even renting a spare room in your house are ideas.
Now might be a good time to strengthen your professional network and update your resume. Don’t wait until you need a new job to prepare for the job search.
Look at your budget to identify areas where you could trim spending if necessary. For example, canceling subscription services you don’t use often, switching to generic brands or eating out less often can help you save money without sacrificing too much of your lifestyle. Consider postponing large purchases (such as buying a new car) or avoid incurring new debt to pay for them.
Take stock of all your debts, including the amount owed, term, interest rate and required minimum payments, and make a plan to pay them down. Focus on your high interest rate debt first and prioritize making all the minimum payments.
If you have multiple debts with high interest rates and a good credit score, look into whether consolidating debt makes sense. Consolidation can lower your monthly payments and interest rates, but it also can include fees and negatively impact your credit score.
If your take-home pay doesn’t cover your living expenses, an emergency fund can help you bridge the gap without selling investments, tapping into your retirement account or taking on debt. We recommend saving three to six months’ worth of living expenses.
If you haven’t created an emergency fund, now is the time to start building one. If you already have one, evaluate whether you are comfortable with the amount you’ve saved based on your income stability and ability to adjust your spending.
If your health or life insurance is tied to your employer, a change in your employment status could impact this coverage. It’s important to keep this coverage, since unexpected events can derail your financial strategy.
There are ways to maintain this coverage on your own. By knowing your options, you can prevent gaps in coverage and prepare for the higher costs of obtaining this coverage individually.
For any insurance policies you’ve purchased on your own, such as home or auto insurance, now might be a good time to see if you can lower your premiums without sacrificing coverage. This could help create more room in your budget.
Stocks typically act as a leading indicator of a recession. By the time a recession materializes, stocks have already priced in a lot of the slowing growth, and the pain has already been felt.
We feel equity market performance can improve coming out of recession, as this is when stocks tend to bottom and even start to rebound. If you sell, you may miss an opportunity to buy into the more favorable market prices once the recession is over. In addition, some of the market’s best performance days historically have come during bear markets and recessions. Missing out on the best days can mean lower long-term returns.
Trying to time the market amid souring consumer confidence can mean getting out at the wrong time or anticipating a recession that never materializes. Falling sentiment and confidence don’t always lead to a recession. In fact, as illustrated in the charts below, recessions have occurred when sentiment is high.
The good news is that bear markets that are usually associated with recessions tend to be short-lived. These bear markets last, on average, about seven months, while the bull markets that follow have historically lasted more than 12 months. We recommend staying invested and exercising investor discipline, even though there may be dark economic clouds ahead.
Source: FactSet, past performance is not a guarantee of future results. The S&P 500 index is unmanaged and cannot be invested in directly.
This chart displays the general trend that equity markets have tended to do well in periods of low consumer confidence in the past while performed poorly when confidence is very high. For example, the 12-month performance of the S&P 500 in 2009 at the lowest consumer confidence data point was 46%.
Source: FactSet, Edward Jones
The graph shows the duration of past recessions and the point in time when bear markets bottomed.
Short-term market declines can be difficult. It can be easier to ride market ups and downs when you confirm your time horizon for achieving your financial goals and your portfolio’s performance expectations.
Keep in mind that not all periods of falling investor and consumer sentiment lead to recessions, but valuations typically fall as sentiment falls. This may translate into better long-term performance for stock investors. For example, as stocks moved into bear market territory earlier this year, lower valuations but still-strong consumer spending set up strong support for equity market returns, which we believe improves long-term return potential.
Similarly, bonds have seen a run-up in yields this year, while prices have fallen. We think yields have probably already peaked and won’t move much further for the rest of this year. If much of the rapid move higher in bond yields is likely behind us, historically this could offer a good time to buy bonds, particularly for long-term investors.
If a recession does materialize, bonds tend to hold up better than equities and also offer diversification benefits. In addition, we believe yields will likely fall and prices will rise, translating into better potential returns for investors. While lower stock valuations and higher bond yields may translate into better potential returns going forward, you should expect periods of volatility as we progress through the cycle.
Income, goals, debt, time horizon and age can all impact the amount of risk you should take when investing. Too much risk in your portfolio could lead to losses in the short term that you’re not prepared for. Not enough risk in your portfolio could put your long-term goals in jeopardy.
Investing is all about balance, including balancing the return you need to reach your goals with your comfort level with risk. Determining this balance will help you build and maintain an investment portfolio that works for you.
We think now is a good time to revisit your comfort with risk. Your circumstances can change, and your capacity for risk might also have changed. Check in with your financial advisor, especially if your life circumstances have changed.
Diversifying your investments across a variety of stock and bond asset classes, also known as asset allocation, can help you manage your portfolio’s risk. Diversification does not guarantee a profit or protect against loss in declining markets; however, it may help ensure your portfolio is aligned with your financial goals and comfort with risk.
As a rule, bonds have lower levels of volatility and risk, but also lower total returns, while stocks offer higher levels of risk and return. Additionally, higher-quality bonds, such as Treasuries, are more likely than high-yield bonds to move in the opposite direction of stocks, which can enhance diversification when financial conditions are worsening. International investments can provide additional diversification benefits. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.
We believe it’s important to look at your exposure to each asset class to help ensure your portfolio is diversified across various segments of the market. This can help prepare you and your portfolio for changing market conditions.
Quality investments can help cushion the impact economic downturns may have on a well-diversified portfolio. Higher-quality segments of the market tend to be more stable than lower-quality investments. Additionally, as we move through the later stages of the economic cycle, we believe higher-quality asset classes are more likely to outperform lower-quality counterparts.
We suggest focusing on large-cap stocks over small-cap stocks and on companies with strong balance sheets. We also favor U.S. investment-grade bonds, particularly given their higher yields relative to the beginning of the year. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.
Your portfolio’s mix of stocks, bonds, sectors and styles can shift as asset classes perform differently over time. Bringing your portfolio back to your optimal mix helps lessen any surprises during down markets.
Rebalancing can help with diversification — an investment that has performed well can represent more of your portfolio than your ideal mix of investments would suggest is appropriate.
There are generally two approaches to rebalancing:
- Threshold rebalancing — This occurs when your portfolio mix drifts by more than a set rate (such as 5% or 10%) from your original target. Because threshold rebalancing occurs whenever your portfolio shifts rather than on a set schedule, it can have higher trading fees and tax implications.
- Calendar rebalancing — With this strategy, you schedule when rebalancing will take place (such as quarterly). This can result in more portfolio drift than threshold rebalancing but can help limit fees and taxable gains.
Bringing your portfolio mix back into line is a smart move, in our view, that helps keep your portfolio aligned with your comfort with risk and financial goals in periods of heightened economic uncertainty. Rebalancing does not guarantee a profit or protect against loss.