Half of Americans say they’re worried that a recession is around the corner – and that the next downturn will also deliver a major market crash.
That’s according to a recent survey by Allianz Life, which also found an increase in interest for financial products that balance growth with protection.
While investors want to protect their assets in case of a downturn, it’s important to avoid major mistakes, experts say, such as trying to time the market or selling all your investments in fear.
The 2008 recession – when $7.4 trillion was lost in stock wealth from July 2008 to March 2009 – still feels fresh for many investors. It colors their anxieties about what might happen in the next rough patch, says Brad McMillan, chief investment officer for Commonwealth Financial Network.
But, he says, it’s unlikely that the next economic downturn will be as severe as the Great Recession, which also wiped out $3.4 trillion in real estate wealth and led to a spike in unemployment.
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A recession is “when the economy gets smaller. Investors hear about it and it seems like a big incoherent thing,” McMillan says. “A recession is very probable in the next year or two, but it won’t be nearly as bad. It’ll be like getting a mild cold, unlike pneumonia.”
Investors plan for the long term, which means developing a strategy that will work through both up and down cycles, says Greg McBride, chief financial analyst at Bankrate.com.
That’s a tactic that Kris Lindquist, 51, a television producer in Los Angeles, has applied to his portfolio. Lindquist has structured his investments around corporations that have reliably paid dividends through downturns, such as Ross Stores. The companies also have a history of boosting dividend payments, which he likes because it adds to a portfolio’s long-term returns.
“They are buy-and-hold forever,” he says. “I'm confident it will weather a recession well.
Even in 2008, none of them cut their dividends.”
Below are 3 tips from experts about how to prepare your portfolio for a recession.
Consider your time horizon
Your age should be a top consideration when preparing for a recession, experts say. Because investors in their 20s and 30s have a longer time horizon until retirement than those in their 40s and older, they’ll have more time to recover from a downturn and may not need to make as many tweaks to their strategies.
But investors closer to retirement may need to rethink their approach, says Bankrate.com’s McBride. For instance, it may be prudent to reduce risk by shifting some assets into cash and short-term investments that can fund the first few years of retirement, he adds.
Investors are often anxious about a market downturn yet haven’t articulated why they are worried, McMillan adds. An older investor, for instance, may be anxious that a recession could mean a loss of income in retirement.
“Dig into why you are worried, because it helps you clarify what you need to do,” he says. “If you are in your 50s and 60s, it’s a very different answer, and that gives rise to a very different solution set.”
Don’t time the market
Trying to sell your investments before a recession and jumping back in to catch the upswing is a losing game, experts say.
“Some people will say, ‘Sell all your portfolio to cash then use that money to buy stocks at the lowest point,’” says Jamie Cox, managing partner for Harris Financial Group. “That's not a strategy that everyone will be able to time perfectly. They need to make sure their portfolios are diversified all the time.”
A better strategy, he says, is to rely on dollar-cost averaging, or making systematic contributions to an investment over time, which takes the guesswork out of deciding when to buy assets while also smoothing out volatility in prices.
“You pick the investments you like and make systemic contributions at some frequency, such as monthly,” he notes. “If there is a recession and those stocks drop, then you would buy units at lower prices and average your cost from when you bought it.”
Plan for opportunity
Lastly, investors concerned about a recession may want to put money aside in cash, which they can then invest at the next market downturn, experts say.
“There are reasons to be in cash, and one of the biggest reasons is you can buy when things are cheaper,” McMillan says. “The downside is that it's easy to buy when things are high but hard to buy when things are low.”
Lindquist, the television producer, says he’s taking that strategy to heart and putting aside more cash in anticipation of the next recession: “I’m looking forward to a buying opportunity.”
This article originally appeared on USA TODAY: Retirement: If recession fears weigh on you, here's how to invest