Now that we’ve officially entered a bear market, fear of a recession is mounting. According to a 2022 CNBC + Acorns Invest In You Survey, 81% of adults say the US is likely to experience a recession (1). A recession is defined as a time of significant economic decline lasting a few months. Between continuous supply chain interruptions, the war in Ukraine, and inflation toping 8.5% this year, it’s no surprise consumers are nervous. While a bear market does not always precede a recession, 70% of bear markets do typically come with a recession (2).
However, if history has taught us anything, it’s that bear markets are always followed by bull markets. Now, how long that bear market lasts will vary. The average length of a bear market is 289 days or about 9.5 months (much shorter than the average length of a bull market-2.7 years) (3). If you have been through a bear market as an investor before, you know that better times are ahead. However, that may not stop you from feeling a little uneasy. Below are five ways you can protect your money during a recession.
Typically, it’s recommended to have at least 3-6 months worth of emergency expenses stashed away in a savings account that is easily accessible. With economic uncertainty ahead, perhaps increasing that account to hold 6-9 months is a safer bet. This fund should sit in a safe and easily accessible account you can access at a moments notice such as a high yield savings account.
I don’t recommend loaning money to friends and family at any point, let alone when entering a bear market. Loaning money to people (especially without contracted terms) is messy. When a recession is looming, it is wiser to keep a strong hold on your money and ensure it’s spent wisely. While this is a pretty blanketed statement, there are exceptions though few and far in between. If you’re a very comfortable financial position and a friend needs $10 I would say just loan it out. However, if you’re nervous about making ends meet and protecting your money during a recession, best to keep it tight to the chest. If you’re still unsure, you can check out our post on lending money to friends and family.
During a bear market or recession, I would actually recommend keeping your money in the market. People’s first instinct tends to be to sell off investments to recoup as much lost profit as possible. However, as history has taught us, this can have colossal consequences. Since 2006, if you stayed invested in the S&P500, you would have actualized a 10.6% annualized total return. If you missed the 10 best days, you would have missed out on half that gain and only realized a 5.1% annualized total return (4). Time in the market is greater than timing the market. To hedge against market volatility, dollar cost averaging can be a great investment strategy to protect your money during a recession. Dollar cost averaging involves investing money at smaller increments over time at regular intervals vs. investing large amounts all at once that may be poorly timed.
While consumers tend to cut spending during a recession, there are sectors that continue to thrive. Healthcare, utilities, and consumer goods are sectors that generally continue to perform well during a recession. For example, the S&P500 Utilities Index returned 10.4% in March (5). Demand for electricity, gas, and consumer staples tends to stay stable over time and are generally recession proof (but not always).
Lifestyle creep tends to occur over a long period of time and generally occurs when consumers face a steady increase in income. As we make more money, we allow ourselves a better lifestyle including more expensive clothing, better vacations, and larger homes. While these things are generally not bad, they can wreak havoc on our budgets during tough economic times. Lifestyle creep makes us think we can’t live without that expensive skin cream or frequent takeout. However, for many of us, there were times that we didn’t have access to these things and lived just fine.
Protecting your money during a recession does not have to be stressful. The best advice I’ve personally heard is to just stay the course and not let the headlines drive you investments. Remember why you started investing in the first place and don’t make rash decisions.
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