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Worried about the economy? Read on to see how you can set up your portfolio to withstand a recession.
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A lot of people think the U.S. is on the verge of a financial crisis. Worse yet, 39% of Americans think we’re already there, according to an April Nationwide survey. And 38% of Generation X and 29% of baby boomers expect a prolonged period of severe downturn.
It’s easy to see why so many people feel this way. Not only have recession warnings been abundant, but the banking sector has seen its share of upheaval over the past few months. And that alone has a lot of people spooked.
Clearly, none of this paints a very rosy picture. But if you’re worried about a recession and general economic instability, then there’s one key move you can make to protect your portfolio.
It’s all about branching out with your investments
Economic downturns and stock market declines don’t always go hand in hand. In fact, in 2020, when unemployment levels were sky-high and there was a lot of economic turmoil, the stock market, after a brief decline, actually had a pretty good year.
But it’s easy to see why investors may be bracing for losses in their IRAs and brokerage accounts. And if you’re worried about your portfolio, one of the most important things you can do is diversify your holdings.
If you limit yourself to stocks within the same few market sectors, your portfolio might take a massive hit if the economy tanks and those specific sectors are impacted. But if you branch out so you’re invested across a wide range of market segments, then you’re less likely to see such extreme dips in your portfolio even if the economy worsens.
Now, there are a couple of different ways you can branch out in your portfolio. One option is to simply buy lots of different stocks. You don’t need 100 of them — but you may want to aim for a good 25 or so across a range of sectors.
Another option is to invest in broad market ETFs, or exchange-traded funds. If you buy shares of an S&P 500 ETF, what you’re effectively doing is putting your money into 500 large companies without having to buy shares of each one individually. ETFs are a great choice for investors who are worried about hand-picking the wrong stocks or simply want more instant diversification.
Stay positive, but be prepared for a financial crisis
We don’t know to what extent, if any, economic conditions will worsen as 2023 moves along. And either way, a lot of people are of the mindset that things are pretty bad already, as evidenced by the almost 4 in 10 Americans who think we’re currently in the throes of a crisis.
Either way, a diversified portfolio could be your ticket to getting through a period of economic rockiness with minimal losses. So if you can’t remember the last time you took a look at your holdings, log into your account and see how your money is spread out. And if you’re not happy with your level of diversification, make some near-term changes before it becomes even harder to rebalance your portfolio.
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