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Recession fears are mounting. Here's how to protect your money

Warnings of a potential recession aren't surprising given how many tripwires there are in today's economy.
A push by the Federal Reserve to raise interest rates and combat high inflation. Supply chain shortages. An ongoing global health crisis. And of course, the geopolitical earthquake caused by Russia's invasion of Ukraine, which is also threatening to create a world food crisis.
Even if the US doesn't fall into a recession -- and there are signs it may not -- there are plenty of economic headwinds that could have potentially negative effects on your finances. Here are ways to assess your situation and guard against losses.
Lock in a new job now
With ultra-low unemployment and plenty of openings, it's a job seeker's market right now. But if there's a recession, that could change quickly. So make hay while you can.
"If you are not working, or are looking for a better position, now would be a good time to take advantage of the very strong job market and lock in a position," said Florida-based certified financial planner Mari Adam.
To help in your search, here are some resume dos and don'ts to keep in mind.
Cash in on the housing boom
If you've been on the fence about selling your home, now might be the time to make the leap.
The housing market has been on a tear, with year-over-year prices up 19.8% in February, according to the latest S&P CoreLogic Case-Shiller home price report.
But mortgage rates are also on the rise, which may dampen demand. "I would suggest that anyone planning to put their house on the market do so right away," said Adam.
Cover your near-term cash needs
Having liquid assets to cover you in emergencies or severe market downturns is always a good idea. But it's especially crucial when facing big events beyond your control -- including layoffs, which typically increase during recessions.
That means having enough money set aside in cash, money market funds or short-term fixed income instruments to cover several months of living expenses, emergencies or any big, anticipated expense (e.g., a down payment or college tuition).
This is also advisable if you are near or in retirement. In that case, you may want to set aside a year or more of living expenses that you would ordinarily pay for with withdrawals from your portfolio, said Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab. This should be the amount you would need to supplement your fixed income payments, such as Social Security or a private pension.
In addition, Williams suggests having two to four years in lower volatility investments like a short-term bond fund.
That will help you ride out any market downturns should one occur and give your investments time to recover.
Don't trade on the headlines
Rapid-fire news reports about higher energy and food prices or talk of a potential world war or nuclear attack are unnerving.
But making financial decisions based on an emotional response to current events is often a losing proposition.
"Making a radical change in the midst of all this uncertainty is usually a decision that [you'll] regret," said Don Bennyhoff, chief investment officer for Liberty Wealth Advisors and a former investment strategist at Vanguard.
Look back at periods of crisis over the last century and you'll see that stocks typically came back faster than anyone might have expected in the moment, and did well on average over time.
For example, since the financial crisis hit in 2008, the S&P 500 has returned 11% a year on average through 2021, according to data analyzed by First Trust Advisors. The worst year in that period was 2008, when stocks fell 38%. But in most of the years that followed, the index posted a gain. And four of its annual gains ranged between 23% and 30%.
If you go back as far as 1926, that annual average return on the S&P has been 10.5%.
"Staying the course may be hard on your nerves, but it can be healthiest for your portfolio," Williams said.
That's not to discount the seriousness of nuclear threats or the chance that this period could diverge from historical patterns. But were things to truly escalate globally, he noted, "we'd have more to be concerned about than our investment portfolios."
Review your risk tolerance
It's easy to say you have a high tolerance for risk when stocks are soaring. But you have to be able to stomach the volatility that inevitably comes with investing over time.
So review your holdings to make sure they still align with your risk tolerance for a potentially rockier road ahead. And while you're at it, figure out what it means to you to "lose" money.
"There are many definitions of risk and loss," Bennyhoff said.
For instance, if you're keeping money in a savings account or CD, any interest you're earning is likely being outpaced by inflation. So while you preserve your principal, you lose buying power over time.
Then again, if it's more important to preserve principal over a year or two than risk losing any of it -- which could happen when you invest in stocks -- that inflation-based loss may be worth it to you because you're getting what Bennyhoff calls a "sleep-easy return."
That said, for longer-term goals, figure out how much you feel comfortable putting at some risk to get a greater return and prevent inflation from eating away at your savings and gains.
"Over time you're better off and safer as a person if you can grow your wealth," Adam said.
Rebalance your portfolio
Given record stock returns in the past few years, now is a good time to rebalance your portfolio if you haven't done so in a while.
For instance, Adam said, you may be overweight in growth stocks. To help stabilize your returns going forward, she suggested maybe reallocating some money into slower-growing, dividend-paying value stocks through a mutual fund.
And check to see that you have at least some exposure to bonds. While inflation has resulted in the worst quarterly return in high-quality bonds in 40 years, don't count them out.
"Should a recession result from the Fed's aggressive interest rate hikes to quell inflation, bonds are likely to do well. Recessions tend to be far kinder to high quality bonds than they are to stocks," Bennyhoff said.
Make new investments slowly
If you have a large lump sum -- maybe you just sold your business or house, or you got an inheritance or big bonus -- you may wonder what to do with it now.
Given all the global uncertainty, Adam recommends investing it in smaller chunks periodically -- e.g., every month for a given period of time -- rather than all at once.
"Space out your investing over time since this week's news will be different than next week's news," she said.
Stay cool. Do your best. Then 'let go'
Whatever the news today, building financial security over time requires a cool, steady hand.
"Don't let your feelings about the economy or the markets sabotage your long-term growth. Stay invested, stay disciplined. History shows that what people -- or even experts -- think about the market is usually wrong. The best way to meet your long-term goals is just stay invested and stick to your allocation," Adam said.
Doing so will help minimize any damage a rough market in 2022 may cause.
"If you've built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it's likely the recent market drop will be a mere blip in your long-term investing plan," Williams said.
Remember, too: It's impossible to make perfect choices since no one has perfect information.
"Collect your facts. Try to make the best decision based on those facts plus your individual goals and risk tolerance." Adam said. Then, she added, "Let go."
(If you want to help Ukrainians who have had to flee or who stayed behind to fight, here's a growing list of organizations to which you can make a donation.)

Apr 30, 2022 11:04
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