Think about staying invested if you can
Historically speaking, investors who hold on to their investments through recessions see their portfolios completely recover, and individuals who don't invest in the market at all lose out.
A bank account is typically the safest place for your cash, even during an economic downturn... Even if you still have a paycheck coming in during the coronavirus situation, your financial future might seem uncertain -- and you might be feeling the need to stock up on cash, in addition to toilet paper and canned goods.
To protect your portfolio, it's wise to keep your money in the market for as long as possible -- ideally, decades. It's impossible to predict how the market will perform in the coming weeks, months, or even years. But historically, it's always managed to earn positive total returns over decades.
On average, it takes around five months for a correction to bottom out, but once the market reaches that point and starts to turn positive, it recovers in around four months. Stock market crashes, however, usually take much longer to fully recover.
What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
Inflation Is Eating Away at Your Funds
According to the Bureau of Labor Statistics, the average rate of inflation from April 2023 to April 2024 was 3.4%. If you've been keeping your money in a savings account with a lower yield than the rate of inflation, you should switch over to a higher-yield account.
Regardless of the economic climate, investors need emergency savings to cover expenses in the event of a job loss or other unexpected bills, experts say. However, savings benchmarks can depend on your family's circumstances.
Precious metals, like gold and silver, tend to perform well during market slowdowns. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up, too. You can invest in precious metals in a few different ways.
The Bottom Line
CDs are a comparatively safe investment. They can provide a stable income regardless of stock market conditions when they're managed properly. Always consider emergency money that you might need in the future when you're thinking of purchasing a CD or starting a CD ladder.
Stocks and bonds have relatively low transaction costs, allow you to diversify more easily and leave your cash more liquid than real estate (although the stock market is typically more volatile than the housing market). Meanwhile, real estate is a hedge against inflation and has tax advantages.
Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss. Cash doesn't grow in value; in fact, inflation erodes its purchasing power over time. Cashing out after the market tanks means that you bought high and are selling low—the world's worst investment strategy.
“The demand for travel and hospitality services typically declines as consumers cut back on discretionary spending,” Sarib Rehman, CEO of Flipcost, said. “To attract customers, airlines, hotels and travel agencies often lower their prices and offer more promotions.”
So, the first thing you should do to make your portfolio more recession-resistant is shore up your cash reserves. Otherwise, you may be forced to sell stocks during a market decline, thereby locking in losses and undercutting your portfolio's capacity to recover.
“While it can be tempting to withdraw all your funds from a bank and keep them at home, banks are typically more secure and offer protection against theft or loss. Plus, keeping money in a bank allows for easier access to funds if needed for emergency expenses or unexpected bills.”
It's a good idea to keep enough cash at home to cover two months' worth of basic necessities, some experts recommend. A locked, waterproof and fireproof safe can help protect your cash and other valuables from fire, flood or theft.
As a general rule, if you withdraw funds before age 59 ½, you'll trigger an IRS tax penalty of 10%. The good news is that there's a way to take your distributions a few years early without incurring this penalty. This is known as the rule of 55.
Consumer discretionary companies
This sector can be particularly susceptible to recessionary pressures, as the economy slows and people start spending less. Consumer discretionary companies move more dramatically with consumer sentiment and economic cycles, which can worsen in times of financial uncertainty.
The recession lasted 18 months and was officially over by June 2009. However, the effects on the overall economy were felt for much longer. The unemployment rate did not return to pre-recession levels until 2014, and it took until 2016 for median household incomes to recover.
The 20%-25% Profit-Taking Rule in Action
View the chart markups below to see how — and why — you want to take most profits once a stock is up 20%-25% from its most recent buy point.
It's important to keep in mind that while being savvy with your cash can get you high returns given the current market environment, these accounts still don't outpace inflation. You should never substitute a cash account for an investment strategy, especially for long-term goals such as retirement.
The 3 5 7 rule is a risk management strategy in trading that emphasizes limiting risk on each individual trade to 3% of the trading capital, keeping overall exposure to 5% across all trades, and ensuring that winning trades yield at least 7% more profit than losing trades.