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Don’t lose sleep over a recession. Read on for one easy way to protect your portfolio.
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Are we headed into a recession in 2023? There seem to be some mixed signals on that front.
The Federal Reserve has warned consumers to gear up for a downturn, albeit a mild one. But unemployment is still low and jobs are still getting added to the economy. That indicates that we’re not about to see conditions deteriorate too badly.
Still, it’s best not to get too cocky about the state of the economy — especially if you have money invested in a brokerage account or IRA. It’s hard to say when things might take a turn for the worse. And if a recession hits, it could impact the stock market. That could lead to lower portfolio values — and a world of stress for the people who own them.
The good news, though, is that there’s a simple step you can take to protect your portfolio from a recession. And if you follow one basic rule, you may not lose so much as a dime if economic conditions worsen.
It’s all about thinking long term
Some people who invest in stocks do so with the intent of getting rich quickly. If you adopt that same attitude, you might easily end up losing money in stocks — either during a recession or otherwise. But if you take what’s known as the “buy and hold” approach to investing, you’ll put yourself in a better position to get through a recession unscathed.
The “buy and hold” strategy is simple. Add quality stocks or ETFs to your portfolio. Hold them for many years, and only dump them along the way if they begin underperforming in a major and unrecoverable way. That’s really it.
Let’s say your portfolio is loaded with different stocks whose total value at present is $10,000. If a recession were to hit, you might see your portfolio value drop down to $8,000. But if you don’t unload any of your stocks, then in a year or two, your portfolio value might come back up to $10,000. And a year or two beyond that, it might rise to $12,000. And so forth.
Prepare to be patient
You may be inclined to start selling stocks during a recession to minimize your losses. But often, selling stocks when their value declines means making your losses official rather than just hypothetical.
Rather than go that route, commit to a long-term investing strategy. You may have to wait longer to reap the rewards, but you’ll better protect yourself from losses.
That said, for your “buy and hold” strategy to work well during a recession, you’ll need to make sure you have money to access outside of your portfolio in case you experience job loss and need help paying your bills. So make sure your savings account is in good shape before economic conditions decline. That means having enough cash to cover at least three months of essential bills. If you have a solid emergency fund to tap, you may not need to liquidate stocks while they’re down out of desperation.
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