What implications does Trump’s trade war have on the stock market and the possibility of a recession? How can investors effectively prepare for a potential economic downturn? What steps could individuals take to protect themselves financially during times of uncertainty?
The escalation of Trump’s trade war this week crushed the stock market and boosted recession calls. Uncertainty and fear are powerful motivators to take drastic measures, but it’s important not to panic. Here’s what financial planners told BI recently about how people can prepare for a recession. The stock market sell-off this week was historic, and with it came a chorus of recession calls from top forecasters. Investors are grappling with the uncertainty of President Donald Trump’s agenda of implementing sweeping tariffs and firing enormous swaths of the federal workforce. On Friday, the Nasdaq 100 officially entered bear market territory, down 20% since mid-February. The S&P 500 is down about 13%. Meanwhile, calls are growing for the US economy to enter a downturn, with some forecasts even predicting a period of stagflation, a dire combo of low growth and high inflation. So what’s one to do in the face of such pessimistic views of the market and the economy? Business Insider spoke with financial pros about what people can do to prepare for a possible recession.
This is crucial. As people scan the headlines, fear can be a powerful motivator to take drastic measures. But it’s important not to act impulsively or be overly emotional about your plan and the actions you take that could impact your life. Gina Bolvin, the president of Bolvin Wealth Management Group, said that because GDP data is backward-looking, it’s possible that the economy will emerge from a recession before we even learn one has officially occurred. From an investment perspective, Blovin stressed that long-term investors should keep buying assets to take advantage of the lower prices. "The only change to your portfolio should be to confirm it’s diversified and you can weather the storm in good times or bad," Bolvin said. "Don’t panic. The headlines — and the market — change quickly."
As for specific investment considerations, stocks are often more volatile during a recession. If you’re looking to shield your portfolio from big swings in equities, this could be a good time to increase your holdings of things like ultra-safe US Treasury bills, said Lisa Featherngill, the national director of wealth planning at Comerica Wealth Management. Importantly, if you’re invested for a long-term goal, such as retirement, don’t panic and sell into a tumbling market. While dips occur, the stock market’s path over the decades has been consistently up and to the right. Understanding your monthly spending is critical. Panziera said it’s also key to knowing where you can cut back if you lose your job.
Separating your budget items into a "needs" and "wants" category can help identify what items may need to be on the chopping block during a loss of income. "Knowing exactly what you need each month can also help to determine the optimal amount of cash to keep readily available versus what you can comfortably deploy in long-term investments that might earn a greater return," Panziera said. "Closely examining your budget may not be the most enjoyable task, but it is an important one." Brett Panziera, CFP, an associate director of financial planning at EP Wealth Advisors, said it’s crucial to build and maintain a cash reserve that can cover nondiscretionary expenses in the event that you lose your job. This cash reserve prevents having to withdraw from invested assets that may be trading at a lower value because of a market decline. Essentially, without an adequate emergency fund, you risk selling stocks at low prices to make ends meet.
"Even outside of a recession, you should aim to have an amount of cash on hand to fund at least six months of your expenses, or if you are retired and don’t have employment income to support your spending, perhaps up to two or three years," Panziera said. "Your investments need time to recover when the market is down, and this can potentially take years to happen." Martha Callahan, CPA, CFP, a portfolio manager at FBB Capital Partners, said it’s important to keep investing in your career during periods of economic stress. Learning and refining new skills tied to your career can help protect you against inflation and make you more marketable when searching for employment.
"Your skillset can be one of your best defenses against inflation. Wages tend to rise over time, and the more your skillset is in demand, the greater chance you have of growing your income and outpacing inflation," Callahan said. "Becoming an expert in your field can also make you one of the last to get laid off." If you are worried about an economic slowdown, Callahan recommends you prioritize paying down debt, as it can quickly grow if you miss payments because of lost income. "Especially in today’s interest rate environment, where average credit card interest is around 20%, credit card debt will quickly balloon and can be hard to recover from," Callahan said. "Paying down debt will boost your financial stability." Featherngill, the wealth planner from Comerica, recommends paying down debts with the highest interest rate first. "As an investment, repaying debt is like earning a rate of return equal to the interest rate on the debt," she said. "For example, if you have a credit card that is charging 18%, repaying that credit card debt is the equivalent of earning an 18% rate of return." Read the original article on Business Insider.
5 Actions to Take Now Ahead of a Possible Recession
As economic indicators fluctuate and experts debate the potential for a recession, many individuals may feel anxious about their financial future. A recession, characterized by a decline in economic activity, can lead to job losses, reduced income, and increased uncertainty. While it can be challenging to predict the timing and severity of economic downturns, there are proactive steps you can take to safeguard your finances and prepare for any potential impact. Here are five actions to consider:
1. Build or Strengthen Your Emergency Fund
One of the most crucial preparations for a potential recession is to ensure you have a well-funded emergency savings account. Experts typically recommend having three to six months’ worth of living expenses stashed away for unforeseen circumstances, such as job loss or unexpected medical expenses. This safety net can provide you with peace of mind and financial resilience during tough times.
If you don’t already have an emergency fund, prioritize building one now. Start by setting a specific savings goal and create a budget that allows you to set aside a portion of your income each month. If you already have some savings, assess whether it’s enough for your needs and consider increasing your contributions. Opt for a high-yield savings account to maximize interest, ensuring your money works harder for you while remaining easily accessible.
2. Review and Adjust Your Budget
In times of economic uncertainty, having a clear understanding of your financial situation becomes even more essential. Take the time to review your budget, tracking your income and expenses meticulously. Identify areas where you can cut back on discretionary spending, such as dining out, subscription services, and entertainment.
Consider adopting a more frugal lifestyle to bolster your savings. This doesn’t mean you have to deprive yourself; instead, focus on making smarter choices about how you spend your money. For example, try cooking at home more often and engaging in free or low-cost activities in your community. Make it a fun challenge to see how much you can save each month by altering spending habits.
3. Diversify Your Income Streams
Relying solely on one source of income can be risky, especially in the event of a job loss. To prepare for a possible recession, explore ways to diversify your income streams. This could involve taking on a side gig or freelance work in your spare time, utilizing your skills in writing, design, programming, tutoring, or any other area where you excel.
Alternatively, consider making passive income investments, such as stocks, real estate, or peer-to-peer lending platforms. While this often requires initial capital, the returns on these investments can provide additional financial security when your primary source of income is threatened.
4. Assess Your Debt Situation
High levels of personal debt can be a devastating burden during economic downturns, as losing a job or facing salary cuts can make debt repayment challenging. Now is the perfect time to assess your debt situation, prioritize repayment, and explore options to streamline your financial obligations.
Begin by making a list of all your debts, including credit cards, loans, and any other financial obligations. Focus on paying off high-interest debts first, which typically carry the heaviest financial burden. Consider consolidating loans or negotiating lower interest rates with your creditors, if possible. Additionally, avoid taking on new debt unless absolutely necessary. Reducing your debt load can enhance your financial stability and improve your credit score, which can be crucial if you need to make significant purchases or loans in the future.
5. Stay Informed and Adjust Financial Strategies
Understanding the economic landscape is key to navigating a recession successfully. Stay informed about economic trends, market fluctuations, and policies that may affect your finances. Regularly reading financial news, following expert analyses, and engaging in discussions about the economy can help you make educated decisions about budgeting, investing, and saving.
In addition, consider reevaluating your long-term financial goals. A possible recession may require you to adjust your investment strategy, especially if you have significant assets in volatile markets. Consult with a financial advisor, if necessary, to discuss risk management strategies, asset allocation adjustments, and retirement planning. They can provide personalized guidance based on your unique situation.
Conclusion
While the prospect of a recession may feel daunting, taking proactive steps now can help mitigate its effects on your personal finances. Building an emergency fund, reviewing your budget, diversifying income, assessing debt, and staying informed are practical strategies that can enhance your financial resilience. Preparation is key, and by adopting these actions, you’ll be better positioned to weather the storm, regardless of how the economic landscape evolves.
Here are five actions to consider in preparation for a potential recession:
Assess and Adjust Your Budget: Review your current financial situation and expenses. Identify areas where you can cut back or eliminate non-essential spending. Establish a budget that prioritizes essential needs and savings.
Build an Emergency Fund: Aim to save at least three to six months’ worth of living expenses. This fund can provide a financial cushion in case of job loss or unexpected expenses during a downturn.
Diversify Income Streams: Explore additional sources of income, such as freelance work, part-time jobs, or online businesses. Diversifying your income can provide more financial stability in uncertain times.
Invest Wisely: Re-evaluate your investment portfolio to ensure it aligns with your risk tolerance and long-term goals. Consider shifting to more conservative investments that may offer stability during market fluctuations.
- Enhance Your Skills: Take advantage of training or educational opportunities to improve your skills or learn new ones. This can increase your adaptability and employability in a competitive job market.
By taking these proactive steps, you can better navigate potential economic challenges.