It’s easy for investors to feel invincible during an economic boom. The problem is that this can lead investors to think that nothing can ever go wrong, and there’s no risk of losing all their money. But as we’ve seen over the past few months, things can change in an instant.
Technically, we are in a recession right now, primarily driven by the novel coronavirus. And there’s no telling how long this recession could last, what its eventual impacts will be, and how the market will be impacted.
Expect the worst
What’s the worst that could happen in a recession? If you’re nearing retirement, your biggest fear is probably losing your job. Not only would you lose income; you might also have to draw down your savings to make ends meet while you look for work.
Rising unemployment, unfortunately, is a hallmark of a recession. So it’s best to take stock of your finances and see how well you’d fare if you were laid off.
You should view recession warnings as a kind of wake-up call to review your family’s balance sheet.
Rather than make big new purchases, it’s better to pay down debts, particularly high-interest credit card debt. You’ll increase your cash flow — and, if necessary, benefit from a larger credit line for emergencies.
Diversify
The lure of significant returns on stock makes many people make bad investment decisions. For example, some people will invest all their money in a single share with massive profits. This is a big mistake since they could go bankrupt if the company offering the stock went bust.
The best way to avoid this is by diversifying your portfolio. Like with a self-directed IRA. This means that a wide range of asset classes should make up your investment portfolio, including assets like real estate or private loans. This will help you lower your investment risk during a recession.
A self-directed IRA allows for your retirement funds to be invested in alternative assets, assets outside of stocks and bonds. Investing in assets that aren’t tied to the stock market, and will hedge against downturns and instability.
Make a plan
Finally, develop a plan for your portfolio that suits your goals: retirement in five years, for example. Don’t let the short-term terrors of the stock market scare you into making drastic moves, such as yanking all your money out of stocks and pouring it into cash.
A good asset allocation means that, from time to time, you’ll have to rebalance, moving money from investments that have performed well into those that have done poorly.
If you don’t know how to make a financial plan, consider investing in one. You can find fee-only financial planners at www.napfa.org. And remember that recessions eventually pass.