Many economists say the United States will fall into a recession next year, according to a new poll by the Financial Times and the University of Chicago’s Booth School of Business. Indeed, 70% of the 49 economists polled said they thought we’d declare a recession in 2023. Of course, whether or not those concerns prove to be correct remains to be seen, but if you want to prepare for that possibility, here’s what the pros say to do.
Don’t derail your long-term plans because of fear
It’s important not to let fear wreck your long-term investment strategy, pros say. It has taken the S&P 500 only 4 months, on average, to recoup losses from the 23 market corrections (declines of 10% to 20%) since World War II, and 14 months, on average, following the 10 “garden variety” bear markets (declines of 20% to 40%) during that same time period, according to data compiled by Sam Stovall, chief investment strategist at CFRA Research. “If you are a nervous Nelly, then simply remind yourself of the speed with which it’s taken for the market to get back to break even,” says Stovall.
Warren Buffett himself emphasizes the importance of investing for the long term and trying not to time the market, at least for most investors. “Don’t watch the market closely,” Buffett told CNBC back in 2016. “If they’re trying to buy and sell stocks, and worry when they go down a little bit … and think they should maybe sell them when they go up, they’re not going to have very good results.”
But if you’re really nervous, consider going a little more conservative
Even so, not everyone feels comfortable riding out a storm that brings with it a lot of uncertainty. In that case, investors should take a slightly more conservative approach with their portfolio, advises Brian Robinson, a certified financial planner and partner with SharpePoint.
What does that look like in practice? Start by selling some investments in your portfolio, then, Robinson says, consider using the proceeds to buy things like short-term Treasury bonds, bond exchange-traded funds, and shares of companies that pay solid dividends.
These types of portfolio changes will keep you invested, even if the stock market crashes. “You want to do this over time,” Robinson advises. You can spread out the buying and selling over a period of a few months and make sure you buy with the intention of holding onto it for at least a while, pros say.
And focusing on a well-diversified portfolio is a way to be a pragmatist, Stovall says, adding that bonds and stocks that pay high dividends both offer a “cushion” if the market declines. What’s more, so-called defensive stocks — specifically those in the consumer staples, healthcare and utilities sectors — typically fall less than the rest of the market during a selloff, he adds.
Buy stocks at lower prices with any extra funds you have
If you want to take a hands-on approach to navigating a market crash, preparation is only half of the plan — you should also take the opportunity to buy stocks at lower prices, pros say. But do it using extra money you have — and buy mutual funds or other investments that you’re comfortable letting sit in the market for a while as stock prices rebound.
Identifying the “right” market dip to buy is very difficult — and may be a good opportunity to brush up on technical analysis or consult a market technician for advice, Stovall recommends. “Because fear is such a great motivator, basically if it looks like everybody is throwing out the baby with the bathwater, then usually that’s a good time to buy,” says Stovall.