What can I do to protect myself from a recession?

With unprecedented tightening of monetary policy since March of last year and the market continuing to be unstable, the risk of a recession has increased. You may be wondering how you can protect yourself from a recession.

What is a recession and are we going to have one?

A recession is a sustained period of decline in economic activity. There’s no exact cause—recessions can happen due to many economic variables. Since March 2022, the Federal Reserve has reversed course from an aggressive stimulus policy to a tightening stance in a short period of time. Monetary policy works with a lag of about one year, so we are now feeling the impact of the initial rate hikes made last year. Accordingly, it is possible the central bank has tightened too aggressively, and there is a risk of a recession later this year.

What can I do to protect myself from a recession?

The most important thing to remember in times of economic uncertainty is to follow your long-term plan. Making sudden or drastic financial decisions, based on fear or uncertainty, is never a good idea. Here are several other practical ways to protect yourself.

1. Create or add to your emergency fund
If you don’t already have an emergency fund of three to six months’ worth of expenses, now is a good time to create one. The funds should be easily accessible in case you need them.

2.Diversify your portfolio
Diversification can help protect your portfolio from unexpected zigs and zags in financial markets. Having a diversified portfolio reduces risk and smooths out some of the variability in returns between asset classes.

3. Focus on essential spending and debt reduction
As much as possible, focus your spending on only those things that are essential, such as housing and healthcare, over nonessential items, such as major trips or buying a second home. Similarly, assess your financial situation and look for ways to reduce debt in the near term, particularly any loans with high-interest rates, such as credit card debt.

4. Invest in high-quality fixed income
Though savings accounts are paying more than they used to, investing excess cash in high-quality fixed income including government bonds, corporate debt, and money market funds can lock in better yields. Working with a firm like Badgley Phelps, that has expertise in constructing and managing individual bond portfolios, can help take advantage of the current interest rate environment—and, unlike with a bond fund, manage it to your specific needs and situation.

5. Reassess market opportunities
Market volatility can be used as a moment to reassess opportunities. This may mean taking advantage of price declines to purchase attractive long-term investments at a discount. Sometimes market volatility can be a great opportunity to buy stocks on sale.

While most stocks decline during recessions, some tend to perform better during difficult periods. For example, healthcare, food, and beverage companies have generally performed better than major averages during recessions as demand for these products and services is not heavily influenced by fluctuations in economic growth.   

6. Focus on the long-term
In any time of market uncertainty, it’s important to focus on the long-term. The market has followed an upward trajectory over time, but there has been a lot of volatility along the way. To combat these swings in value, it’s important to have a long-term plan and give the market time to work for you.

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