5 Tips to Help You Prepare for a Recession

Do you feel anxious about a potential recession and how it could impact your financial well-being? While economists are starting to change their tune regarding a recession, suggesting a soft landing or economic slowdown instead, the reality is that it’s hard to predict what might occur.

A recession can have far-reaching impacts on individuals, businesses, and the economy as a whole. The reasons behind a recession are diverse and complex and can be triggered by spikes in oil prices, government monetary or fiscal policies, a decline in consumer demand, financial market turmoil, and more. ⁽¹⁾

Regardless of what lies ahead, the most important thing we can do right now is to take the appropriate steps to prepare ourselves. This article explores practical strategies for proactively getting ready for an economic downturn while keeping things in perspective. Whether you’re an experienced investor or just starting out, these tips will help you navigate any financial turbulence and emerge even stronger on the other side.

1. Build an emergency fund and be smart about where you keep it.

Most people know that experts recommend setting aside enough cash to cover three to six months of living expenses. Having this safety net to cover a sudden job loss or medical emergency will help you avoid resorting to high-interest loans or credit card debt.

Now, where should you park that cash? While leaving it in your checking account might be tempting, those interest rates are typically low. High-yield savings accounts are an option, but it’s important to note that the FDIC insurance limit for checking and savings accounts is currently $250,000 per depositor, per insured bank, for each account ownership category. So, if you’re holding onto more than that, it’s time to consider other options.

Recent bank collapses have led to an influx of depositors moving their cash to money market funds⁽²⁾. With their high liquidity, low risk, and competitive yield, money market funds are an attractive option for many. In today’s high interest-rate environment, money market funds’ yields are especially appealing, with an average yield of 5.09% as of July 31, 2023 ⁽³⁾. However, it’s important to remember that money market funds are considered investment products rather than bank deposits; thus, they’re not FDIC insured. But fear not, these funds are held in brokerage accounts, most of which are covered by SIPC insurance (Securities Investor Protection Corporation) in the event of a broker dealer’s failure. The SIPC coverage limit is $500,000 per customer (or per separate capacity if the customer has multiple accounts), including up to $250,000 in cash. At Resource Consulting Group (RCG), we’ve helped several clients navigate these options and park their rainy-day funds in high-quality money market funds.

2. Lean on your financial plan.

At RCG, we’ve assisted many of our clients in creating, reviewing, and monitoring their financial plans to help them achieve long-term financial independence. The financial planning process starts with setting clear financial goals and taking inventory of your current situation. This means assessing your assets, liabilities, income, and expenses while developing a strategy to achieve your personal goals. Though you can control certain factors such as your spending, asset allocation, retirement date, etc., you can do little to control market performance. By nature, the market is risky and volatile.

In the comprehensive financial planning process, our analysis incorporates simulations of various scenarios, including market downturns resulting from recessions. This enables us to construct resilient financial plans that are designed to withstand fiscal storms and provide peace of mind. By diligently factoring in the impacts of adverse market conditions, we are able to identify if a client’s current trajectory toward financial independence may falter. In such instances, the financial plans we assist in formulating offer insightful recommendations, outlining the necessary measures or adjustments to bolster their likelihood of success.

3. Create a downturn survival plan.

Are you relying on your investment portfolio to cover your current living expenses? If so, it’s essential to have a plan to protect your finances during market downturns. Although equities can help beat inflation and build wealth over time, selling them for your cash needs when markets drop can harm your financial well-being. That is where a downturn plan comes in handy. Having sufficient fixed income to fund your expenses for a few years eliminates the need to sell equities at market bottoms. At RCG, we closely monitor our clients’ asset allocation to help ensure they have the right mix of growth assets and fixed income to ride out market ups and downs. A downturn survival plan helps provide clients with confidence that their portfolio is well-positioned to sustain their current lifestyle regardless of market volatility.

4. Stay the course.

During a recession-induced stock market drop, it can be tough for investors to remain calm and it can be tempting to want to sell stocks to avoid potential losses in your portfolio. However, successful market timing is virtually impossible, and emotional trading tends to hamper investors’ long-term returns. An old adage says, “It’s not about timing the market, but about time in the market.”

Instead of trying to time the market, it’s wise to maintain a well-diversified portfolio that aligns with your long-term investment goals. We will also take advantage of opportunities to rebalance your portfolio by selling assets that have performed well and reinvesting in other assets or asset classes that have not performed as well. This buy-low/sell-high strategy helps you maintain a balanced portfolio, reduce risk by avoiding over-exposure to certain assets, lock in gains, and increase your returns⁽⁴⁾.

5. Keep things in perspective.

Recessions typically last around 17 months, but the last six since 1980 have been shorter, averaging less than 10 months⁽⁵⁾. Staying focused on your long-term goals and sticking to your strategy rather than making impulsive decisions based on temporary market fluctuations is important. Remember, taking steps to prepare for a recession can help mitigate its impact on your financial and emotional well-being and set yourself up for success. Let RCG help guide you through the challenges and opportunities that a recession can present so that you can feel secure about your financial situation.

1. International Monetary Fund. Claessens and Kose. “Recession: When Bad Times Prevail.”

2. The Wall Street Journal. Kiernan. 2023. “Investors Flock to Money-Market Funds Amid Banking Crisis”

3. Crane Data LLC (measuring money markets) at https://cranedata.com/. 2023.

4. Journal of Financial Planning. Daryanani. 2008. “Opportunistic rebalancing: A new paradigm for wealth managers.”

5. National Bureau of Economic Research. “U.S. Business Cycle Expansions and Contractions.”

Resource Consulting Group is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. Resource Consulting Group and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Resource Consulting Group and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Resource Consulting Group and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Resource Consulting Group and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.