Escape Lever #1:

How exposed are you?

Where are you in your own life’s timeline?

If you’re early in your working career and all of your investments are designated for retirement, you’re able to ride out the inevitable recession with a portfolio that’s entirely invested for growth. You just have to avoid panicking and selling out.

In this case, you’re a couple of decades away from needing the money. Staying invested, even through a nasty experience like the Great Recession, can potentially lead to a much larger portfolio later when markets recover.

On the other hand, if you’re closer to retirement, you can’t afford for your entire portfolio to drop right when you need to start withdrawing money. That means having some money in other assets like cash and bonds.

Either way, be realistic about the risks you face.

Cash is not riskless. It can potentially help protect you from stock market drops, but it doesn’t protect you from inflation. In 2022, U.S. inflation reached highs not seen for decades.²

Bonds and other fixed-income investments can also potentially help protect you from stock market drops, but not from interest rate hikes. Keep in mind that you’ll still need investments to help your portfolio’s potential growth over time.

Consider all your risks. Don’t forget that your own human capital is an asset. If your family relies on your income, you may need to look into ways to protect your family should something happen to you.

Key questions to ask yourself include:

• How much of my total assets are subject to recession risk?
• Do I need to do something to mitigate the risks my family and I face?
• Am I prepared to deal with additional risks like rising interest rates or inflation?
• Is there a financial professional I trust who can help me determine the risks I’m facing and how to properly plan for them?

Escape Lever #2:

Flex your flexibility

When it comes to buying cars, clothes, or even vacations, what are the three magic words all purchasers love to hear? “It’s on sale.” Yet too many investors start pushing the panic button and selling when the stock market goes on sale.

The Roaring Twenties may be over soon. In the last century they ended with a severe recession, and there’s no reason to think we’ll get out of this century’s current decade unscathed. But there’s no reason for them to end so badly for you.

Stock dips (and yes, crashes) are the time to scoop up some potential bargains. To paraphrase Warren Buffett, be greedy when others are fearful and fearful when others are greedy.

Just make sure that you’ve still got your cushions against the freefall of the market. Don’t deplete your protection against stock market dips (escape lever #1) or your income generators (escape lever #3) to snatch up sale items. Keep your hedges intact and your income flowing.

Key questions to ask yourself include:

• Are there companies or concepts I’ve always wanted to invest in that are currently too expensive?
• How much availability do I have for going bargain-hunting when the recession arrives?
• Have I developed a game plan for avoiding fear-based transactions?
• Is there a financial professional I can turn to to help me spot opportunities during the next recession?

Escape Lever #3:

Batten down the hatches with diversification

You may have heard of the bucket strategy, with “slices” of your portfolio “pie” invested in several buckets of assets. If you will need some money from your portfolio in less than five to ten years, 100% stocks won’t work.

Money in cash covers the expenses you expect in the next year or so. Another bucket is for bonds, which generate income for you and are designed for the next few years. You’ll also need a stock bucket to hedge against inflation in the long term.

Having the right blend of assets can help you breathe easier and sleep at night when the recession hits, knowing you have enough cash and interest income to keep you going.

That way you don’t have to dip into your long-term investments and potentially sell at a loss. At the same time, you’re not giving up all the growth potential in your portfolio.

Key questions to ask yourself include:

• Will I need to start tapping into my investment portfolio within the next few years?
• Is my portfolio properly diversified so it won’t keep me up all night during the recession?
• Am I able to generate enough income that I won’t need to sell off my stocks when prices are dropping?
• Do I have a strategy to maintain the balance between my investment buckets?
• Is there a financial professional who can help me determine whether I’m properly diversified in the event of a recession?

Ugly Mistake #1:

Investing with your heart and not your head

Contrary to popular belief, acting like an ostrich and sticking your head in the sand may not be a bad way to deal with a recession! It helps to ignore the financial news because it's going to be full of gloom and doom in a recession.

Riding your stocks all the way down to the bottom without selling them can help prevent you from making losses real.

As long as you stay invested, the decrease in portfolio value is only a paper loss. “Buy low, sell high” is a simple concept. But it’s not always easy when your friends, colleagues, and the news anchors are all running around screaming that the sky is falling.

Investing rules help, too. Such as, “I will buy a stock (or mutual fund) that interests me when its price drops 10% below its average price.” Or “I will only sell when the price of my asset is at least 10% higher than it was when I bought it.” Having rules helps you take the emotion out of investing.

It’s very easy to get greedy when prices are rising and fearful when prices are falling. But smart investors find ways to stay out of the fray so they can focus on building wealth for themselves.

Key questions to ask yourself include:

• Do I have strong rules to invest by?
• What is my strategy to ignore the noise when a recession arrives?
• Am I able to keep my eyes on my own wealth?
• Do I have a financial professional to turn to who can help keep me sane and in my lane?

Ugly Mistake #2:

Going it alone

When recessions arrive, things can get real ugly real quick. It’s hard to tell even when the recession has arrived, since the economic data takes a while. Market drops don't always predict one, either. Is a one-day market drop just the start of a massive plummet to the bottom — or is it just a blip?

With so much information available, it’s hard to separate the noise from the signal. Everyone has an opinion about what stock to buy that will last past the recession, which sectors to avoid, how much of your portfolio should immediately be sold into bonds and/or cash, and so on.

Doing it yourself looks fine when prices are on the upswing, because a rising tide lifts all boats. But when the seas get rough, your portfolio may be threatening to overturn during the onslaught. Experienced deckhands can help keep you afloat.

You may notice that wealthy investors ask for help all the time! They have dedicated financial professionals to help them navigate when the economy gets choppy. They’re not trying to figure out everything by themselves, because they recognize when they don’t know what they don’t know.

Key questions to ask yourself include:

• How confident are you that you can stick to your investing path during a recession?
• Have you discussed your investment strategy with someone who’s knowledgeable about markets and recessions?
• Is your current strategy the right one for the upcoming recession?
• Do you have a financial professional who can provide you with the help you need?