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Recent stock market volatility has raised worries about a possible recession. A recession is a decline in economic activity that lasts for several months; because of how data are reported, recessions are often identified only after they begin. Early signs can include slowing job growth, rising inflation and squeezed corporate profits.
Now is the time to prepare. Start by taking a clear inventory of your finances: track your income, expenses, debt, savings, investments and net worth. Simplifying and consolidating accounts can make this easier.
Build an emergency fund with three to six months’ worth of living expenses stored in accessible, low-risk accounts such as a high-yield savings, money market account or short-term CD. This prevents you from having to tap retirement accounts or sell investments at a loss if you face job loss or an unexpected expense.
Review your investment mix and confirm it fits your long-term goals and comfort with risk. Asset allocation—the split between stocks and fixed income—should reflect your tolerance for volatility. Younger investors who can ride out big market swings can often hold a higher share of stocks. Older or more risk-averse investors may prefer a larger allocation to bonds and other fixed-income assets. A simple rule of thumb is to subtract your age from 100 and invest that percentage in stocks, with the remainder in fixed income (for example, a 40-year-old would hold roughly 60% stocks and 40% bonds).
Once your cash cushion and allocation are in place, avoid the instinct to sell after market declines. Selling locks in losses and risks missing the market rebound. Instead, stick to your plan and rebalance regularly—every six to 12 months—to keep your target allocation in check. Rebalancing also means buying more when prices are down and trimming when they’re up, which can reduce long-term volatility.
If inflation seems to be accelerating, consider stocking up on nonperishable staples before prices rise further. Buying items like canned goods and toiletries in advance can help reduce short-term strain on your budget.
Recessions are a recurring feature of economic cycles. Historically, there have been many recessions, and stock markets have recovered and grown over time. For example, remaining fully invested from 2003 to 2023 would have produced an annual return around 9.7%. Missing the five best days in that period would have reduced annual returns to about 7.2%; missing the 15 best days drops returns further to roughly 4.1%, and missing the 30 best days would have nearly eliminated gains. These figures highlight the cost of trying to time the market and the value of staying invested.
If you prefer professional help, consider consulting a financial advisor to review your plan and allocation. But whether you manage investments yourself or work with an advisor, the prudent steps are the same: know your financial picture, maintain an emergency fund, set an asset allocation that matches your risk tolerance, rebalance periodically, and avoid impulsive moves during downturns. Short-term dips are normal and rarely derail long-term financial goals.
