Although my models show that there is no recession on the horizon for at least the next 6 months, it’s always a good idea to be prepared for one. Here are some simple precautions you can take to help you survive when the next one arrives.
1. Make sure you have enough money in your emergency fund. The stock market will go down, but your emergency fund (in the form of cash, money-market funds, Treasury bills, CDs, or other stable assets) will not. If the next recession is worse than usual, one of the biggest risks you’ll face is a loss of income (layoff, or loss of employment.) Having a 6 month cash cushion will help you ride it out.
2. Rebalance your portfolio faithfully, according to your written plan. And at the first sign of trouble, start rebalancing even more frequently. Most of my clients are on a quarterly schedule, but you can do this once per year and still be in good shape. But when a recession is threatening (I send email alerts to all of my subscribers and coaching clients), it’s important to speed up this process.
3. Have a Plan B in place. All of my clients have a written plan, including steps to take when the economy gets into serious trouble. The benefit of having a contingency plan in place is that it keeps you from making emotional trading decisions. For example, some clients set up tripwires based on the likelihood of a recession. Others use percentage declines in the value of their portfolio. When you have tripwires in place, and you update them regularly, you will know what to do and when to do it.
4. Add an extra asset class to your portfolio mix. Many investors use 3 asset classes – stocks, bonds, and cash. For long-term investors this is adequate. But adding a 4th asset class will improve your diversification and act as a buffer against market volatility. Consider real estate investment trusts (REITs), Master Limited Partnerships (MLPs), Absolute Return Funds, Managed Futures Funds, Commodity Funds, Option Buy-Write Funds, etc.
5. Don’t panic. Without question, the costliest mistake people make is panic selling. Even people who have a written plan can fall into this trap. When the market is falling apart, it’s very hard to resist the fight-or-flight instinct. Self-preservation is a powerful emotion to overcome, and that’s exactly what contingency plans are there for.
If you would like information about creating or updating your written plan, send me a message at info@zeninvestor.org or fill out the Customer Contact form. There is no charge for an initial consultation about planning, and you will not be required to sit through a sales pitch from me. I promise to answer your questions to the best of my ability, and it will be up to you to decide whether it’s worth pursuing from that point.
Very nice work, thank you. Your articles are among the best I’ve seen about how to handle volatile stock market periods, and especially bear markets. Keep it up!
Outstanding article. I just signed up for your weekly newsletter. Thanks for your efforts!