Prepare for the Next Market Downturn
With a negative yield curve, trade wars and slowing growth in the economy, a poll showed that majority of business economists believe we will enter a recession in the next 2 years (National Association for Business Economics). While this seems inevitable with the facts in front of us, there is no litmus test for a recession or market drops and they have been wrong before. With so much uncertainty, don’t be frozen when the time comes to make a decision - take steps now to set yourself up for success when a drop does occur. Here are 5 things you can do now to help during the next downturn.
- Emergency savings: Most are predicting a mild recession, but if a major one comes there could be a loss of income and you may need to rely on savings to get by for a while. Keep 3-6 months expenses in savings to help buffer hard times.
- Debt: Paying off debt puts you in a better cash flow position in order to weather any hard-economic times. Start with the highest interest debt first and build off of that momentum to wipe out your debt.
- Clean up portfolio: Do you have investments or stranded accounts that you have just left alone? Do you have stocks or funds that you have kept but don’t really know why? Now could be the time to consolidate those accounts and sell those investments.
- Evaluate your risk: If you are taking on more risk than you need to in order to have a successful plan, now might be the time to scale back. Also, model your current portfolio in a downturn and make sure you would be comfortable losing the amount of money it predicts. One of the best indicators of a successful plan is making sure you are comfortable with the risk you are taking.
- Have a game plan: When markets dip have a plan for what you are going to do (and follow it). It may be to do nothing - or it may be to put cash to work and get more aggressive. Just like we practiced fire drills in school, have a plan in place for what you will do when a big market drop happens.
It’s inevitable that markets will drop, it’s really just the matter of when. Make sure you are prepared for this eventuality so it doesn’t ruin your financial plans.