If you were born in 1960, you would have already lived through 7 recessions; 5 as an adult and 3 in which GPD fell by more than 2%. All that’s to say that recessions are an inevitable part of the way the economy works, and if you’re not financially planning for the possibility, you’re just waiting to lose your savings.
In 2008, $10.2 trillion in wealth was wiped clean from the American economy, impacting not just banks but ordinary workers, savers, and retirement investors. It was a lengthy recovery, and depending on decisions you made during that period, and the resources you had to invest, you may not have enjoyed much of the benefits.
While younger investors can usually expect the economy to recover and their portfolio to regain value, there are two major problems with this way of thinking:
1) Moving your money into less-risky investments mean you don’t have to watch your entire portfolio suffer.
2) Recessions don’t care when you plan to retire. When they happen, they can decimate your retirement savings if you’re overexposed to stocks.
Two different concerns for two different age groups, but both can use similar solutions to protect their portfolios from future downturns. Simply put, the answer is to diversify.
Why Stock Prices Go Down
First it helps to understand why stock prices go down during a recession. When you buy stocks, you own a share of a company. It may produce dividends when the company does well, and the value appreciates when other investors believe the future of that company is bright. A recession causes a liquidity crisis, hurting revenues and company performance. The bad news hurts stock prices and that affects the value of your savings.
The Danger of Bond Yields
While some investors might turn to bonds during a recession, higher yields also mean you’re taking on higher risk. When you buy corporate bonds, there is no guarantee that the corporation will be around to pay down the debt. On the one hand, it can seem like a safe bet that the world’s biggest corporations will be around after a recession. On the other, some companies have massive debt, and it took billions in bail-outs after the last recession to save auto companies.
Alternative Assets to Prepare for a Recession
People love gold when they start to worry about a recession. Concerns about economic growth propel so many people to buy gold because they know it’s a safe bet. Alternative assets are an asset class unaffected by (or that benefits from) economic downturns.
One of the advantages of metals is that it’s easy to buy gold online and much easier to shift a reasonable allocation of your portfolio into precious metals, compared to assets like real estate or even cryptocurrency.
Gold is the ultimate fear-based asset. Prices will usually surge during a liquidity crisis. Investors want to get away from high-risk markets that are most exposed to poor economic performance. You can reduce a lot of damage done by recessions by allocating more of your savings into bullion.
When a recession happens, don’t cross your fingers and hope that it will pass without taking too much out of your retirement savings. Take action and invest in alternative assets.