On June 15, the Federal Reserve raised its federal funds rate by 0.75%, the largest increase in 28 years. The reason for such a rapid rate hike was to slow down inflation, which has been battering consumers for months on end. But rate hikes are apt to make consumer borrowing get more expensive, and as such, spending is likely to shrink in the coming months.
If consumer spending declines fast enough, it could be enough to spur a recession. And as an investor, that may be a worrisome scenario to contend with. But if you make these three moves in the coming months, you can set yourself up to weather an economic storm.
1. Shore up your emergency fund
During periods of economic decline, unemployment numbers can soar. And that’s why it’s important to secure your emergency fund — in case you find yourself out of work and it takes a while to get hired again.
Now the old convention was to sock away enough money in savings to cover three to six months’ worth of living expenses. In the wake of the pandemic, many experts now advise saving more like nine to 12 months’ worth.
To be clear, if a recession does hit later this year or early next, we won’t necessarily be looking at the same major unemployment crisis that hit during the first half of 2020. But having extra cash reserves on hand certainly isn’t a bad thing.
Remember, too, that many people’s portfolios are down right now, so having to liquidate investments to address a need for cash isn’t ideal. And that’s not the sort of thing you’d want to do if you were to lose your job, either. So the better shape your emergency fund is in, the more you can protect your portfolio.
2. Keep investing
You may be eager to conserve cash in light of a potential recession. But don’t take that to mean that you should neglect your IRA or 401(k) plan. These accounts are loaded with tax benefits that make funding them a smart move, even at a time when you may want to have extra cash on hand.
3. Look at recession-proof investments
Some investments are riskier than others during periods of economic decline, so it’s a good idea to take a look at your portfolio and see if any changes are in order. If you’re not invested in any recession-proof industries, you may want to shift things around.
What sort of industries fall into that bucket? Healthcare REITs and stocks can be a good bet, because consumers have no choice but to spend on healthcare, regardless of the economic backdrop at hand. Utility companies fall into a similar boat — consumers will cut back on things like apparel and dining out before having their electricity turned off. Think about the expenses in your life that are absolutely nonnegotiable, and use those to guide your investing strategy.
We don’t know when a recession will hit, or if a full-blown recession will strike at all. But many financial experts seem convinced that that’s where the economy is headed, and based on recent events, those predictions seem reasonably spot on. But if you take these steps to prepare, you may find that you’re able to make it through a recession completely unscathed.
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