"5 Actions to Take Now Ahead of a Possible Recession"

As the economic landscape continues to shift, the specter of a recession looms large. With the inverted yield curve flashing a warning sign and the Federal Reserve predicting a 23% chance of a downturn in the next 12 months, it's crucial for investors to take proactive steps to safeguard their financial well-being. Here are five actions you can take now to prepare for a potential recession.

1. Check Your Asset Allocation

Recessions are volatile times for stocks, and trying to time their ups and downs is notoriously difficult. Instead of attempting to navigate the daily ins and outs of a volatile market, focus on what you can control and ensure that your asset allocation is appropriate for your risk tolerance and broader financial goals. Over the last fifty years, stocks have actually averaged a positive return from the start of a recession to its end, despite massive selloffs in the middle. This highlights the importance of maintaining a balanced portfolio that can weather market volatility.

2. Take the Long View

Over the last 50 years, there have been seven recessions – yet the S&P 500 is up ~19,000% over that time frame anyway. Dollar-cost averaging, regularly contributing to savings plans, and focusing on longer-term financial goals are all prudent during periods of elevated volatility and fear. For the longer-term investor, recessions can even be periods of opportunity – the average 10-year return from the start of a recession is over 140%. As the saying goes, time in the market beats market timing – even when the market seems bleak.

3. Revisit Your Financial Plan

We know a market in recession tends to take a long time to rebound – about 18 months on average, with the longest recovery taking five years. Investors should make sure they have the liquidity needed to withstand a lengthy and volatile recovery. Building up your financial reserves for emergency expenses in money markets and interest-bearing accounts can keep you from having to sell stocks when the economy is in a recession and equity markets are down. Decreased portfolio performance and asset values can impact all areas of your wealth management plan – from retirement planning to estate planning to education funding – so it’s worth reconsidering those decisions in the context of an extended market downturn.

4. Think About Building a Ladder

One investment strategy worth considering is the bond ladder. If you’re able to ladder individual bonds so the amount that comes due every year matches your annual living expenses, you can create a cushion should markets get rough. This could allow the equity portion of your portfolio to be invested for the long term, giving stocks the ability to rebuild in value as the markets bounce back.

5. Review Any Outstanding Loans

Prioritize eliminating high-interest debt. Be wary of using your assets as collateral for a loan, as recessions can cause the value of financial assets to dip for a period of time. Leverage can be rocket fuel during good times, but a lead balloon during the bad. Along those same lines, for the well-prepared investor, a recession can present new possibilities – interest rates can drop, stock market values dip and assets like housing often get cheaper. As Sun Tzu wrote, “in the midst of chaos, there is also opportunity.”

By taking these steps, investors can better navigate the challenges of a prolonged economic downturn while maintaining financial stability and balancing short-term needs with long-term investment goals.