5 Ways To Recession-Proof Your Finances

Nobody can predict when a recession will happen, but there are ways you can protect your portfolio.

Photo by kwan fung on Unsplash

These days, it seems as though market volatility is the new normal. The stock market seesaws with the latest twists and turns of the ongoing US-China trade war, while Brexit and the Hong Kong protests add to global economic gloom. Singapore meanwhile is anticipating its slowest full-year growth in a decade. Increasingly, market experts are now warning that it’s not a matter of if, but when another recession occurs. 

To be sure, no one can predict exactly when the next one will hit. But acknowledging that recessions are a natural – albeit painful – part of the economic cycle allows you to plan ahead and stay in control of your finances even when markets tumble and crash. 

No matter your age or financial goals, here’s what you can do to minimise your losses during a recession and prepare your portfolio for the inevitable. 

Keep your emotions in check 

During market downturns, your emotions can often be your own worst enemy. It takes restraint not to panic when markets take a nosedive and sell your stocks at the bottom of the market. By selling low, you are essentially turning paper losses into real losses.

Letting yourself be affected by daily market fluctuations, no matter how severe, can lead to hasty investment decisions you may later come to regret. The best thing you can do for your portfolio in this market? Nothing at all. Ignore the market chatter and stay focused on your long-term investment goals. Better yet, resist the urge to check your portfolio daily. Watching your investments go up and down will only fill you with misery and worry. 

Dollar cost averaging (DCA) is one way to help you take emotions out of your investing. By investing a consistent sum regularly – regardless of current market conditions – you eliminate the temptation to second-guess your investment strategy, or to try market-timing strategies that rarely succeed.

The benefits of dollar cost averaging

Commit to an emergency fund

An emergency fund is one of your best defenses during a recession. At minimum, your emergency fund should contain three to six months’ of expenses. If you’re laid off during a recession for instance, you can still tap into your emergency fund to tide you over. This guideline generally works for younger investors who still have time to ride out the market downturn. For older investors on the cusp of retirement or already retired, they should aim to have cash reserves of at least two years’ worth of living expenses. 

Before you balk at the amount, hear us out. Setting aside an ample cash cushion for your sunset years protects your retirement nest egg. If a bear market hits just before you retire, you can draw down your cash reserves without being forced to sell your investments at the market bottom. With some of your funds out of the market, it can also give your portfolio a chance to recover after the downturn.

Diversify your portfolio

Your portfolio should always be diversified, whether or not a recession is looming. It is risky to have all your investments concentrated in just a few individual stocks. If one underperforms, it will significantly drag down your entire portfolio value. 

Instead, make sure your investment portfolio is diversified across different asset classes (e.g. stocks, bonds, commodities etc), different sectors and different geographies. A straightforward way to achieve instant diversification would be to invest in Exchange Traded Funds (ETFs). Purchasing an ETF that tracks a broad market index like the S&P 500 gives you exposure to a basket of 500 large-cap US stocks rather than just a single company. 

Review your asset allocation

Your asset allocation should depend on your risk tolerance, time horizon and investment goals. If your portfolio is aligned with these objectives, then a market downturn should really just be part of your expected investment probabilities.

If you find yourself worrying about your portfolio each time the market swings, you may have the wrong asset allocation. Now’s the time to revisit your allocation and ensure that your portfolio is in line with your risk tolerance and time horizon. If you want a better understanding of your risk tolerance, consider taking Syfe’s risk questionnaire or speaking to a Syfe expert

For investors who have not been rebalancing their portfolios periodically, revisiting your asset allocation is critical as well. For instance, if you’ve chosen a 60/40 stocks and bonds portfolio, your portfolio may now be closer to 70/30 given that stocks have been outperforming bonds over the recent years. Your higher exposure to stocks could now be mis-aligned with your risk tolerance. When faced with market turmoil, you may find yourself feeling pressured to make investment decisions that may not be right for you.

Invest in yourself 

Investing in yourself – whether getting your MBA or deepening your knowledge in your field or industry – is the best investment you can make, and a natural safeguard against the dreaded R-word. 

As you bolster your expertise in a particular niche and make yourself more valuable, you don’t just increase your earnings potential. In the unfortunate event of a job loss, you are better positioned to stand out among the many job applicants you may be up against. So, devote time to reading extensively, attending seminars, or networking with like-minded people. Never stop learning and you will find that it pays off handsomely. 

Think long term

Recessions are undeniably scary, but remember, things always get better. The 2008 financial crisis affected many people, but the market was climbing back up within two years. In fact, over any 20-year period, the US stock market has never lost money – the average annual return over a 20-year period stands at about 6.7%. 

As a long-term investor, your best strategy to weather a recession is to stay invested and not panic. With the right asset allocation and mindset, you’ll not only survive a downturn but emerge wiser and more resilient than you were before.