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Recent stock market turbulence has many people asking whether a recession is coming. A recession is a period of declining economic activity that lasts for several months and is often only recognized after it has begun. Early signs can include slower job growth, rising inflation, and tighter profit margins.
Prepare now
Start by taking a clear look at your finances: know your income, expenses, debts, savings, investments, and overall net worth. Consolidating accounts can make this easier.
Build an emergency fund of three to six months’ worth of living expenses (or more if you prefer). Keep this cash in an accessible, interest-bearing account like a high-yield savings or a short-term certificate of deposit so you don’t have to tap retirement accounts or sell investments during a market downturn.
Review your investments
Once your cash safety net is in place, review your investment mix. Check your asset allocation—the balance between stocks and fixed-income investments—and make sure it matches your risk tolerance and time horizon. A well-diversified portfolio tailored to your comfort with risk is more likely to withstand market swings.
A simple rule of thumb for allocation is to subtract your age from 100 and invest that percentage in stocks, placing the remainder in bonds or other fixed-income assets. For example, a 40-year-old might hold about 60% in stocks and 40% in fixed-income. Younger investors who can tolerate bigger drops may favor more stocks; older or more conservative investors may prefer a larger share of bonds.
Rebalance regularly, roughly every six to 12 months, to maintain your target allocation. Avoid selling in a panic after a market decline—doing so locks in losses and risks missing the market’s recovery.
Practical steps for inflation worries
Before a recession, inflation can accelerate. If prices begin to rise, consider stocking up on nonperishable staples—canned foods, toiletries, and other long-lasting items—so you avoid paying higher prices later.
A long-term view
Recessions are part of the economic cycle. Historically, the stock market has recovered from downturns and produced solid long-term returns. Trying to time the market rarely works; missing a handful of the best market days can significantly reduce long-term returns. Instead, set an appropriate asset allocation, rebalance periodically, and stay invested for your long-term goals.
Get advice if needed
If you’re unsure about managing your investments, consider seeking professional guidance. Options range from online tools and planning resources to consultations with financial advisors. The key steps remain the same: understand your financial picture, build an emergency fund, align your portfolio with your risk tolerance, prepare sensibly for inflation, and stay the course.
