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No matter what your financial position is, we’ve likely all worried over our finances at one point or another during a recession. Whether you’re uneasy about the stock market taking a tumble or a tricky housing market, know that you are not alone. It’s natural to feel on edge in times of economic uncertainty.
Whatever your concern, start by taking a deep breath. Recessions happen, and while we may not be able to sidestep them, there are things you could do to soothe your mind and help protect your wallet.
In these last few months, you may have seen the interest rates on your savings accounts drop and wondered why that happened. In short, it has to do with the economy: when economic activity is sluggish, central banks, like the US Federal Reserve (aka the “Fed”), step in and try to stimulate some spending by cutting interest rates.
It can be hard to predict when rates will change or start going back up. But since we’ve historically come out of recessions, know that interest rates tend to creep back up when the economy gets going again.
In the meantime, savings accounts can still be a good place to put your money in a recession. While you might not be earning as much on your balance, the tradeoff is that savings accounts come with very little risk. In a recession, risk may be more top of mind (more on that in the next section), so a savings account might be able to offer some peace of mind.
For your own protection, be sure the bank that offers your savings account is a member of the Federal Deposit Insurance Corp (FDIC). The FDIC is an independent agency of the federal government, which insures deposits, typically up to $250,000 per depositor, per bank, including principal and any accrued interest.
If you have a CD (certificate of deposit), many come with fixed rates, so you might not see any changes to those numbers during the term of your CD, even if interest rates on your other savings accounts go down.
Just know that if you plan to renew the CD once it’s matured, the APY associated with your account won’t necessarily roll over – instead, it’ll be the current market rate. For example, if you opened a 2-year CD in September 2018 with a 2.35% APY that matures in 2020 and decide to renew that CD, you’ll get whatever APY is offered at that time, not necessarily 2.35%.
Even the most steadfast investors might be feeling a bit anxious these days. While it’s typical for stocks to move up and down, when we’re in a recession, the stakes can seem even higher. If you’re worried about protecting your portfolio, there are still things you could do to help minimize your risk exposure.
First, it’s a good idea to get to know your risk tolerance. Some people are more willing to take on high-risk investments in hopes of potentially scoring bigger rewards, while others feel more comfortable with smaller returns but less risk.
There’s no right or wrong approach, but knowing which way you tend to lean can help you design an investment plan that’s right for you – and can help you stay the course when the stock market gets erratic.
When it comes to risk, take your time horizon, or how long you can let an investment sit before you need to cash out, into account, too. Younger investors who can stay in the game for longer might have a higher risk tolerance than someone retiring in the next few years and can’t afford to ding their nest egg.
It also helps to have some knowledge of investing. Those who are new to investing may get jittery during a market downturn. This is why having a solid grasp on investing fundamentals and how the stock market works can help calm nerves and boost confidence.
Even something as simple as realizing the stock market can be volatile – there will be dips and there will be climbs – can help you stay level-headed in times of uncertainty and resist getting roped into a fad or acting out of desperation. When it comes to investing, it’s important to take the long view and not let short-term market volatility distract you from your long-term goals.
One strategy that could help protect your portfolio from the ups and downs of the market is diversification. (We hate to use analogies, but “don’t keep all your eggs in one basket” is a good one here). A portfolio with a mix of ETFs, stocks, and bonds can help give you peace of mind and ensure you have eggs in multiple baskets.
The general idea is that if one part of your portfolio takes a hit during a downturn, the other assets may help soften the blow. Now, a diverse portfolio doesn’t guarantee you won’t experience losses, but investing in a mix of assets can help limit your overall risk exposure.
Since your retirement accounts are likely part of your broader financial portfolio, you’ll want to keep in mind many of the things we mentioned above: time horizon, risk tolerance, and diversification. How your portfolio performs day-to-day will fluctuate, and to some degree, that’s out of your control (we know, it’s frustrating). The thing you can control, though, is continuing to make regular contributions as long as you’re able.
A recession may seem like a good time to pull back on your retirement contributions and dedicate that money elsewhere, but when saving for retirement, it’s important to take the long view despite current market disruptions. Translation: pausing your retirement contributions could impact your nest egg.
To see how contribution breaks could impact your balance, let’s take a look at an example. Say you consistently contribute $500 per pay period to a portfolio comprised of 60% stocks and 40% bonds with an average rate of return of 8.8%. Using these figures, if you left your money invested for 30 years, you could have $1,769,088 saved in your retirement account.
On the other hand, if you only made those contributions for 20 years, you’d have $655,943. The difference between those is a whopping $1,113,145! Now, that’s not to suggest that you’ll skip contributions for 10 years, but it hopefully gives some insight into how important staying investment and playing the long game is when it comes saving for retirement.
If you own real estate, a recession can bring up a lot of questions about how those assets will be impacted. And if you don’t currently have any real estate investments, you might be wondering if it’s a good time to get in the game (and you wouldn’t be alone in that thought!).
Real estate is often brought up as a “recession-proof” investment, but let’s be honest – there’s no such thing as a recession-proof investment. While it’s true that real estate carries different risks than stocks or your retirement accounts, the real estate market can also be hard to predict. How well (or not) your real estate investments do in a recession likely has a lot to do with what kind of real estate holdings you own.
Investors with rental properties they tap into for income might still be able to collect rent during a recession, if they have existing tenants who pay rent. However, keep in mind that it may be challenging to collect rent right now depending on how your tenants are affected by the recession.
Similarly, owning retail spaces may turn up mixed results. If not much has changed, you could get that rental income from the business, but if the business you lease space to is struggling financially, that could affect your ability to collect their rent each month.
If you’re looking at a recession as an opportunity to get into the real estate game, there are a few things to consider. As of July 2020, mortgage rates were at their lowest since 1971, so if you were thinking about investing in real estate right now, it could be a good time to look into it.
However, while mortgage rates are low, the same cannot be said for housing prices in certain markets. According to Realtor.com, house prices have gone up in 77 of the country's largest metropolitan areas, and overall, house prices had climbed 3.3% year over year by the end of May 2020. Buyers may find themselves in a tough position, but if you’re thinking about selling property and can find an interested potential homeowner, you might see this time as an opportunity.
Wouldn’t it be great if we had ways to keep our sanity in check during a recession as well? While we might not have a fool-proof solution for that yet, it’s fair to say that preparedness and patience can be our friends when it comes to weathering an economic downturn.
Remember: your investment portfolio should be based off a risk tolerance and time horizon that’s appropriate for you, and when it comes to saving for retirement, having a long-view, if you can, is key. Recessions can make for interesting real estate opportunities, but don’t get sucked in without doing your due-diligence first.
And of course, remember that historically we’ve come out of recessions, so a dip in the market is to be expected rather than an immediate cause for concern.
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