After The Great Recession of 2007 to 2009, the U.S. enjoyed the longest bull market — aka a market where stock prices just keep goin’ up — in its recorded financial history.
Then, COVID-19 happened. All good things must come to an end, right?
Since then, the stock market has been volatile, finally slipping into the current bear market that many believe heralds a major economic shift.
That shift? Recession.
For investors who haven’t had the pleasure of living through a recession in their adult lives — hello, younger Millennials and Gen Z! — there’s a lot to be learned about recession and what can be done to keep your portfolio on track through it all.
What is a Recession, Actually?
Technically speaking, a recession begins when a country’s gross domestic product (GDP) drops for two back-to-back quarters.
But more often, a country is considered to be in a recession any time economic activity moves in a downward direction instead of an upward one.
Economic recessions start when people start spending less, which can be caused by numerous factors: uncertainty about the future (we saw this during the early COVID-19 days), job loss or unavailability, rising prices and interest rates, lack of confidence in the economy, etc. In a vicious cycle, as people start to spend less, the economy continues to fall and, if it goes on for long enough, a recession is born.
How Do We Know if the U.S. is in a Recession?
In the U.S., recessions are officially declared by economists at the National Bureau of Economic Research (NBER). Usually, recession-indicating factors have to be ongoing for a full year before they officially acknowledge it.
In 2022, no recession has been officially announced just yet. However, we’re seeing signs that one may be close at hand.
As mentioned, consumer sentiment and spending are essential elements to keep an eye on when you’re on recession watch. And neither is looking too pretty right about now.
As the Federal Reserve raises interest rates the highest they’ve been in decades, prices are up over 8% in a year — putting a big ol’ damper on discretionary and even essential spending. In addition, consumer confidence is the lowest it’s been since mid-pandemic in February 2021.
Together, these leading indicators point straight at a pending recession for the U.S.
But, there is one detail that may be keeping us from going over the brink. We aren’t seeing the layoffs and increasing unemployment rates that we usually do when recessions hit. In fact, the labor market continues to grow right now!
Whether you’re feeling the pain of a possibly-pending recession or not, it’s never a bad idea to know what steps to take to prepare.
How to Prepare for a Recession: 8 Portfolio-Protecting Tips
Safeguarding your savings and portfolio ROI during a recession isn’t at all about making sudden changes. What it’s really about is getting a clear view of your holdings and strategies so you can make tweaks today that set you up for future success.
Here’s how to get started.
1. Take a Realistic Account of Your Entire Portfolio
Like we just noted, it’s really important that you can see your portfolio before you can begin to effectively manage it.
To do so, you’re going to need to find a way to get a “zoomed out” view that will show all of the assets that make up your portfolio.
Most financial tools aren’t really equipped to help you monitor and manage assets that range from physical to digital and traditional to alternative.
But Kubera is.
We built Kubera after noticing a gap in the market. At that time, there wasn’t a single platform that we could use to see everything we owned — from stocks to foreign currencies, crypto holdings, precious metals, heirlooms, real estate, and so on.
It turns out that the personal balance sheet software we built would eventually become a pivotal tool for recession-proofing your portfolio.
To use Kubera to get a complete, trustworthy, and up-to-date view of your portfolio, sign up and start adding your assets in just minutes.
First, fill in all those account-based assets — bank accounts, brokerage profiles, crypto wallets, mortgages, etc. Kubera will update all of these accounts in real-time. How do we do it? It’s all thanks to the custom tech and other integrations we’ve built that connect to thousands of financial institutions — see some of them here!
Now you’re ready to move on to all that stuff no other portfolio tracker knows how to handle. For all your various non-account assets — think collectible investments, cash, heirlooms, artwork, jewelry, and more — you can simply enter them into Kubera’s spreadsheet-like interface.
Just like that, you have a way to see your entire portfolio at a glance.
But what about performance over time?
Yeah, we can help there, too.
Just visit your recap screen in Kubera for an easy-to-read breakdown of asset and net worth changes over time. This viewpoint is pivotal in helping you understand portfolio performance over any length of time, empowering you to make data-based changes instead of knee-jerk reactions at the first sign of economic trouble.
And once you’ve got Kubera tracking your whole portfolio, you can even use the platform to automatically find IRR for investments.
Kubera adds together asset value, purchase price, cash flow in and out, and the holding period to calculate internal rate of return (IRR) — a metric similar to ROI but that takes value and time changes into account, making it more accurate.
Check out Kubera’s IRR calculator in full detail.
It really only takes a few hours to set up Kubera in a way that enables you to get the broad perspective you need to understand your portfolio.
And with that understanding, you can move forward with the rest of the tips on this list.
2. Revisit Your Saving/Spending Ratio
It’s not just your portfolio that you want to make sure you have a clear and far-reaching view of as a recession approaches. It’s also your budget.
When financial times are good, it can be easy to spend a bit more than you think you should on the fun stuff, like dining out even when you have plenty of food at home and splurging on some new tech toys.
However, with the possibility of a recession and the economic uncertainty that comes with it, it may be time to double-check that your spending and saving ratios are healthy.
Start with the 50/15/5 rule:
- Spend 50%, or less, of take-home pay on essentials (home, groceries, gas, etc.)
- Save 15%, or more, of pretax income for retirement
- Save 5%, or more, of take-home pay for the unexpected
Tweak this rule as needed to align with your own household income, spending needs, and financial goals — for example, your retirement savings may need to be more aggressive if you’re just a few years out. Then, adjust your habits to make sure you’ll have enough if times get tough.
3. Build That Emergency Fund ASAP
To expand on that “unexpected” category above — that’s what we also call an emergency fund, or a “safety net.”
Most guidance says emergency funds should contain enough to cover six to nine months of expenses, giving you enough time to replace your job if needed. But that’s in normal times. In our opinion, when it comes to recession planning, a 12-month safety net may be better when jobs are harder to come by.
This fund should be decently liquid so you can tap into it anytime you need. A high-yield savings account is a good option for putting your money to work while it sits there.
It’s OK if your emergency savings fund isn’t fully there yet. The important thing is that you keep putting any extra money toward it until it’s fleshed out. Without compromising retirement savings, of course.
4. Diversify in Multiple Directions
In the context of investments, diverse assets are those that aren’t correlated with traditional stocks. So even if the stock market plummets, these assets won’t. Portfolio diversification is an important factor in keeping up performance even when economic growth stalls. Not sure where to get started? Try out some of today’s most powerful alternative investments.
While diversification is partly about moving some of your portfolio away from stocks, some of it is just about changing up the types of stocks you hold.
Here are some categories that tend to perform especially well during recession times, in which you can purchase stocks or exchange-traded funds (ETFs) today:
- Healthcare (Pfizer, Johnson & Johnson, etc.)
- Food and essential goods (Procter & Gamble, General Mills, etc.)
- Utilities (American Water Works, etc.)
5. Get Creative When it Comes to Makin’ Bacon
You can’t save any more money than you make, right?
If you don’t have enough income to save up for a rainy day and you’re really concerned that a recession will drain your accounts, it’s time to consider ways to create more income.
You can start working on moving to a higher-paying gig, or you can add on a side hustle such as freelancing or delivery driving. Also consider finding ways to generate passive income, like selling courses or other products based on your unique knowledge. An added benefit is that if your full-time role doesn’t fare so well during a recession, a side gig gives you a money-making strategy to fall back on for a short time.
One straightforward thing you can do right now to make more money is move savings into a high-yield savings account. Interest rate increases mean the annual percentage yield (APY) for these accounts is soaring.
6. Prioritize Payments
If you have any debts, before a recession starts is definitely the time to make sure you're paying them off in the right order.
There are different approaches to how people choose to pay off debts. Some go for the smallest first, others go for the biggest. Some even spread their debt repayment budget evenly among all of their accounts every month.
No matter your current method, in light of a possible recession, we highly recommend targeting those with the highest interest fees aggressively. This is especially critical as interest rates rise. Minimum payments on high-interest debts can bury you before you even know what happened.
If you have a good enough credit score, you may want to consider moving your high-interest credit card debt to a single card that offers 0% APR for a period of time. Of course, this is only if you can foot the balance transfer fee (usually between 3% and 5%) and feel confident in your ability to make all your payments on time.
In addition to this strategy, NerdWallet offers several more debt consolidation ideas.
7. Adjust Student Loan Payback Strategy, if Necessary
When talking about debt in the U.S., we certainly can’t leave student loans out of the equation.
While federal student loan repayment is suspended at the time of this writing, there is no way to know how long this relief will last.
If you can afford it, we strongly suggest continuing to make payments, even in times of deferment. Because new interest is on pause, right now is the best time to knock down that principal amount.
If you have a private loan that you end up being unable to repay as a result of the economic downturn, don’t be afraid to reach out to your lender to discuss forbearance or deferment. But keep in mind that interest may still pile up even while you’re paying less or not at all.
8. If You Can Afford it, Keep On Keepin’ On
Finally, the piece of advice that no one wants to hear but we definitely have to say: Keep calm and invest on.
Even after the biggest economic hit since the Great Depression — the Great Recession in ~2008 — it only took the S&P 500 five and a half years to bounce back. And after that, things really took off.
History just goes to show that time in the market really does beat timing the market. If you can afford to, hold on to those stock market investments!
There is also an action you can take if you find yourself in a stable position right now. Buy. Today, your money will buy more stocks than it ever could have when the market was spiking just months ago.
If the sound of all of this makes you crazy, may we offer one last piece of advice: Don’t check your stock portfolio every day — think about your personal finance goals instead.
Resist the Fear Mongering, Lean Into What Works
Protecting yourself and your portfolio during a recession isn’t about buying into overly-complex strategies and overpriced tools. Preparing actually revolves around diving deep into your investments and budget and making informed adjustments that will enable you to weather any storm.
And yeah, you can even use it alongside your financial advisor or wealth manager. All they have to do is integrate Kubera’s white-label solution into their client portal to provide informed guidance when you need it most.
See all that Kubera has to offer when you sign up for a subscription, which comes complete with a preliminary free trial.